APRA today announced amendments to the capital adequacy requirements for banks.
These amendments are being made either to achieve consistency between the capital regime which applies to banks and that for building societies and credit unions*, or to adopt amendments made by the Basle Committee on Banking Supervision to its international guidelines on the capital adequacy of banks.
The changes are as follows:
- Provided they are covered with an adequate level of mortgage insurance through an acceptable mortgage insurer, banks' housing loans with a loan-to-valuation ratio above 80 per cent will, from today, qualify for a 50 per cent risk weight, as now applies to loans with a lower loan-to-valuation ratio. This will bring requirements for banks into line with the present arrangements for building societies and credit unions.
- The risk weight applied to banks' holdings of government securities and other claims on governments is reduced, effective today, from 10 per cent to zero; this will achieve consistency with international practice and with capital adequacy requirements for building societies and credit unions in Australia.
- The risk weight on banks' claims on building societies and credit unions will be reduced to 20 per cent (the same as for banks' claims on each other), effective from the date that building societies and credit unions are subject to the Banking Act and supervised by APRA. This change recognises that all deposit-taking institutions will then be operating under a single licensing regime and common supervisory framework.
- There will be an extension of the matrix of credit conversion factors which allow derivative contracts to be included in the calculation of the credit component of risk-weighted capital. This follows changes made by the Basle Committee on Banking Supervision in recognition of the widening range of risk in derivatives activity. The extension of the matrix differentiates equities, precious metals and commodities as separate classes of risk and adds an extra maturity category for contracts extending beyond five years.
Overall, these changes will reduce slightly the regulatory capital required by most banks. The exact impact will vary from bank to bank depending on the structure of their business.
Copies of the amendments are available on request and on APRA's web site at www.apra.gov.au
Mr LJ Phelps
Executive General Manager
Authorised Deposit-Taking Institutions
Phone: (02) 9210 3140
Fax: (02) 9210 3300