APRA finalises new bank capital framework designed to strengthen financial system resilience

The Australian Prudential Regulation Authority (APRA) has finalised its new bank capital framework, designed to embed “unquestionably strong” levels of capital and align Australian standards with the internationally agreed Basel III requirements1.

The framework, developed over four years of consultation, will help to ensure Australian banks continue to have the financial strength to withstand future adverse economic conditions, ensuring depositors are protected and lending is supported.2

Alongside the new framework, which is summarised in an information paper released today, APRA has published updated prudential standards for capital adequacy and credit risk capital.

As Australian banks already meet the “unquestionably strong” benchmarks set by APRA in 2017, the new framework does not require banks to raise additional capital. Instead, the new framework will strengthen financial resilience by:

  • ensuring existing high levels of capital adequacy are maintained;
  • providing more flexibility and responsiveness to risks in the operating environment;
  • being more risk sensitive, through increasing capital requirements for higher risk lending and decreasing it for lower risks;
  • supporting competition by limiting differences in capital requirements between smaller and larger banks;
  • improving the comparability of bank capital ratios, both domestically and with global peers; and
  • reducing operational burden for smaller banks.

APRA Chair Wayne Byres said an unquestionably strong banking industry is central to the stability of the financial system.

“Capital is the cornerstone of the banking system’s safety and stability. It protects depositors during periods of stress, ensures banks can access funding, facilitates payments and helps banks to keep lending to their customers during good times and bad.

“Although Australia’s banking sector is already strongly capitalised by international standards, the new capital framework will help ensure it stays that way,” Mr Byres said.

Mr Byres also noted that the new standards had been designed to ensure Australia is compliant with the internationally agreed Basel III framework, which is due to come into force around the world from 2023.

“The fact that Australian banks already have the capital needed to meet the Basel standards, without the need for lengthy transitional periods and phase-in arrangements that will be needed in many other countries, is evidence of the underlying strength of the Australian banking system,” he said.

Within the new framework, APRA has introduced a set of simplified capital requirements that can be applied to small, less complex banks (those with under $20 billion in assets and simple business models). The Basel framework has been developed primarily for large, internationally active banks and, while widely used around the world, the cost of implementing the full framework for small banks may outweigh the benefits of prudential safety in doing so.

“The development of a simplified approach for smaller banks avoids unnecessary regulatory burden, without jeopardising prudential safety. It has been designed to benefit a large number of institutions – about three-quarters of domestic banks will be able to take advantage of the simplified approach,” Mr Byres said.

To assist banks to prepare for the new framework, APRA has today commenced consultation on associated guidance material, and will also update associated reporting requirements and other related prudential standards over the year ahead.

The information paper and updated prudential standards are available on the APRA website at: Revisions to the capital framework for authorised deposit-taking institutions.


Footnotes:

1 Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. The measures aim to strengthen the regulation, supervision and risk management of banks.

2 The new framework applies to banks, building societies and credit unions, known collectively as authorised deposit-taking institutions (ADIs). For simplicity, the term ‘bank’ has been used in this media release to capture all ADIs.

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