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APRA proposes changes to make the Australian ADI capital framework more transparent, comparable and flexible

The Australian Prudential Regulation Authority (APRA) has sought industry feedback on potential approaches to adjust the capital framework for authorised deposit-taking institutions (ADIs) to make capital ratios more transparent, comparable and flexible.

The prospective approaches are outlined in a discussion paper released today for industry consultation.

The approaches would not change the amount of capital ADIs are required to hold beyond the unquestionably strong capital benchmarks announced in July 2017.[1] Rather, APRA is considering whether to alter the way ADIs’ capital requirements are calculated and disclosed to facilitate greater domestic and international comparability and transparency of ADI capital strength.

Though Australia’s capital framework is largely based on internationally agreed minimum standards set by the Basel Committee on Banking Supervision, APRA takes a more conservative approach to the definition of capital and the calculation of risk-weighted assets in some areas. Consequently, Australian ADIs typically have lower reported capital ratios than overseas peers with comparable capital strength.

Chairman Wayne Byres said: “APRA’s robust capital framework improves the quality and quantity of the capital held by ADIs, but makes international comparisons more complex.

“The reliance of the Australian banking system on international markets for funding makes it important that investors understand and have confidence in their capital strength during ordinary times and in periods of market disruption.”

The discussion paper released today outlines two general approaches designed to aid ADIs in representing and communicating their capital strength:

  • Under one approach, ADIs would continue using existing definitions of capital and risk-weighted assets, but APRA would develop a methodology allowing them to improve the credibility and robustness of internationally comparable capital ratio disclosures; or
  • Under a second approach, APRA would change the way ADIs calculate capital ratios to instead use more internationally harmonised definitions of capital and risk-weighted assets. To maintain the strength and risk-sensitivity of the capital framework, there would need to be corresponding increases in minimum ratio and/or capital buffer requirements.

APRA is open to considering these approaches independently or in combination, or indeed retaining its current methodology, and is seeking industry feedback on whether the benefits of the suggested approaches outweigh the regulatory burden and associated increase in complexity.

Separately, the discussion paper proposes measures to make the capital framework more flexible in times of stress, including by increasing the size of regulatory capital buffers relative to minimum regulatory capital requirements.

Mr Byres noted: “None of the changes under consideration would change the level of capital ADIs are required to hold to meet the unquestionably strong capital benchmarks. However, by modifying and realigning regulatory capital ratios, APRA will potentially have greater supervisory flexibility to react to situations of bank-specific or system-wide stress, and allow institutions to return to a position of sufficient capital strength.”

The discussion paper can be viewed on the APRA website at: https://www.apra.gov.au/improving-transparency-comparability-and-flexibility-adi-capital-framework

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.

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