17 December 2010
On 16 December 2010, the Basel Committee on Banking Supervision (BCBS) published its final package of banking sector reforms, Basel III: A global regulatory framework for more resilient banks and banking systems. The full details of the reforms can be located on the Bank for International Settlements’ website [www.bis.org].
The capital components of these reforms will:
- raise the quality of capital to ensure ADIs are better able to absorb losses on both a going concern and a gone concern basis;
- increase the risk coverage of the capital framework, in particular of trading activities, securitisations, exposures to off-balance sheet vehicles and counterparty credit exposures arising from derivatives;
- raise the level of the minimum capital requirements, including an increase in the minimum common equity requirement from 2 per cent to 4.5 per cent and a capital conservation buffer of 2.5 per cent, bringing the total common equity requirement to 7 per cent and total Tier 1 capital to 8.5 per cent;
- introduce an internationally harmonised leverage ratio to serve as a backstop to the risk-based capital measure and to contain the build-up of excessive leverage in the system;
- raise standards for the supervisory review process (Pillar 2) and public disclosures (Pillar 3), together with additional guidance in the areas of sound valuation practices, stress testing, liquidity risk management, corporate governance and compensation;
- promote the build up of capital buffers in good times that can be drawn down in periods of stress, including both a capital conservation buffer and a countercyclical buffer to protect the banking sector from periods of excess credit growth.
As a member of the Basel Committee, APRA has been actively involved in developing these global reforms and it fully supports the package announced by the BHBS. APRA has begun work on developing transitional arrangements, draft prudential standards, prudential practice guides and reporting requirements to give effect to these reforms in Australia. APRA anticipates that it will begin consultation on the reforms in 2011 and continue into 2012.