Download copy of Perspectives on Cyber Risk 2017


Join the CHQA Members' Centre

In the CHQA Members' Centre, members can access CHQAnalysis (our in-depth analysis of current issues), News (weekly summaries of governance news), Board Shorts (succinct answers to directors' governance questions), a search facility extending over various governance categories, and information about our seminars and other events.

Apply for CHQA Membership here.

The CHQA Members' Centre is password protected and accessible only to members. There is no joining fee for eligible applicants.

Perspectives on Cyber Risk
play video
   
  
  
   
(Click to edit)

Unquestionably strong capital ratios announced

Unquestionably strong capital ratios announced

July 24, 2017 2:27 PM | Print this page

The Australian Prudential Regulatory Authority (APRA) has released an Information Paper setting out its conclusions with respect to the quantum and timing of capital increases required for Authorised Deposit Institutions (ADIs) to achieve 'unquestionably strong' capital ratios in line with the 2014 Financial Services Inquiry (FSI) recommendation.

Capital ratios

  • By 1 January 2020, the 'four major Australian banks' need to have CET1 ratios of at least 10.5% to meet the 'unquestionably strong benchmark'.
  • For all Internal Ratings Based (IRB) banks this represents an increase of 150 basis points.
  • For other Authorised Deposit Institutions (ADIs) that use the standardised approach to credit risk, it represents an increase of 50 basis points.

Final prudential standards to be released in 2019 to take effect 2021

  • Later this year, APRA intends to release a discussion paper on proposed revisions to the capital framework and the direction of APRA's implementation of the forthcoming Basel III changes to risk-weights as well as measures to address Australian ADIs' structural concentration of exposures to residential mortgages. It will also outline options APRA is considering to improve transparency and international comparability of ADI capital ratios.
  • Following the discussion paper, APRA expects to consult on draft prudential standards giving effect to the new capital adequacy framework in late 2018, leading to the release of final prudential standards in 2019. It is anticipated that these would take effect at the beginning of 2021.

Timing: ADIs expected to meet the new benchmarks by 1 January 2020 at the latest

  • Given the continued uncertainty as to the timetable for the finalisation of Basel III international reforms, APRA concluded it was 'preferable' to implement the FSI's recommendation rather than wait and implement both the FSI recommendation and the international reforms as a single package.
  • The timetable is expected to allow for an 'orderly accumulation of capital' by ADIs that need to do so, and facilitate a smooth implementation of new prudential standards that will institute these requirements.
  • By 2020, five years would have elapsed since the release of the final FSI report, and four years since the Government’s response. Against that background, APRA encourages ADIs to consider whether they can achieve the capital benchmarks more quickly.

The AFR quotes APRA chairman Wayne Byers as saying that APRA's objective is to establish a banking system 'that can readily withstand periods of adversity without jeopardising its core function of financial intermediation for the Australian community'.

Treasurer's comments

The Treasurer has welcomed APRA's decision to increase the level of capital that banks are expected to hold to be 'unquestionably strong' and has further commented:

  • The Government supports APRA’s independent view on capital strength, which will further strengthen Australia’s financial resilience.
  • APRA has always maintained a prudential framework that is above the international minimum, and the resultant resilience in the Australian financial system was a key reason for Australia’s successful navigation of the global financial crisis.
  • The increased requirements will put Australia's capital framework at the forefront of international best practice and help ensure the financial system can endure future external shocks. While APRA's decision comes before the finalisation of international capital standards (Basel III), it is consistent with the likely outcome of global reforms. The Government supports APRA moving forward with this announcement ahead of the continued uncertainty as to the timetable for finalisation of Basel III.
  • The additional capital requirements only impact Tier 1 capital, and therefore do not impact the calculation of the Major Bank Levy which excludes Tier 1 capital.
  • ADIs are well placed, where they do not already meet these new benchmarks, to make up the shortfall by the required deadline of January 2020. This is due to APRA strongly encouraging banks to steadily accumulate capital over the past few years, an effort the Government has supported.
  • The changes should not significantly impact loan pricing or consumers' ability to access finance. APRA envisages that the unquestionably strong capital ratios can be met by 2020 and that the major banks should be able to meet the additional capital requirements from retained earnings, without significantly affecting business growth plans, dividends policies or undertaking equity capital raisings.

Banking sector comments

The major banks have issued announcements acknowledging the release of APRA's 'unquestionably strong' capital ratios. A summary of their responses is provided below:

  • ANZ: 'ANZ advises it is comfortable with its Common Equity Tier-1 (CET1) capital position'
  • Commonwealth Bank: CBA Chief Financial Officer, Robert Jesudason said: 'CBA is well positioned to meet this new capital benchmark. Financial strength is a key priority of CBA’s strategy, and we constantly monitor our capital position and any potential regulatory change which may affect our capital. We will provide a more detailed update on these matters when we present our annual results on 9 August 2017'.
  • Macquarie Group: 'MQG believes that its current capital surplus is sufficient to accommodate the proposed increase in minimum capital requirements outlined in the paper' by 1 January 2020.
  • Westpac Group: Westpac’s Chief Financial Officer, Peter King, said: 'Westpac is well positioned to meet this new benchmark having proactively taken steps to boost its CET1 capital ratio, reporting a CET1 capital ratio of 10.0% at 31 March 2017.'
  • NAB: NAB Group Chief Financial Officer, Gary Lennon, said: 'APRA’s announcement provides clarity and certainty and helps ensure the strength and stability of the Australian banks at what is an important time for the Australian economy…NAB is well placed to respond to these new requirements. We have a strong balance sheet and through discipline and focus have built a capital buffer above our CET1 target range in anticipation of such changes…Acknowledging the reasonable timelines that APRA has set for implementation, NAB expects that we can meet these additional capital requirements in an orderly fashion.'

Media reports

  • In similar reports, both The SMH and the ABC report that the changes will have 'minimal impact' as the banks are on track already to meet new capital requirements. The ABC writes that the big four banks are already holding 'considerably more than the current minimum capital requirement,' and ANZ in particular reportedly 'already meets the new big four standard of 10.5%'.
  • The AFR comments that 'APRA's capital rules are unquestionably good for key stakeholders', investors, depositors and taxpayers because banks are on track to achieve the new capital requirements without large scale new equity share issues and because 'after almost a decade of uncertainty the bank capital regime in Australia is set in stone'.

[Sources: APRA media release 19/07/2017; Information Paper: Strengthening banking system resilience - establishing unquestionably strong capital ratios 19/07/2017; The Hon Scott Morrison MP Treasurer of the Commonwealth of Australia Media Release 19/07/2017; The AFR 19/07/2017; The Australian 19/07/2017; ANZ News Release 19/07/2017; ASX Announcement Commonwealth Bank 19/07/2017; ASX announcement Macquarie Group: 19/07/2017; ASX Announcement Westpac Group: 19/07/2017; ASX announcement NAB:19/07/2017; ABC 19/07/2017; Bloomberg 19/07/2017; The SMH 20/07/2017; The AFR 19/07/2017]

This post appears under the following topics;