The prudential regulator is finally making a push to bring reported Aussie bank capital ratios in line with international peers.
APRA's 'unquestionably strong' regime requires comparisons with the rest of the world's banks and that direct comparison has been lacking until now.
The banking regulator on Tuesday issued a consultation paper proposing changes to the capital framework for banks to make capital ratios more transparent and comparable with global peers.
Wayne Byres, head of banking regulator APRA was quick to say that none of the proposed changes would increase the amount of capital banks are required to hold beyond the unquestionably strong capital benchmarks announced in July 2017.
Rather, he said, APRA is considering whether to alter the way banks’ capital requirements are calculated and disclosed to facilitate greater international comparability and transparency of bank capital strength.
Though Australia’s capital framework is largely based on internationally agreed minimum standards set by the Switzerland-based global regulators, APRA has always said it takes a tougher approach to the definition of capital and the calculation of risk-weighted assets in some areas.
"Consequently, Australian banks typically have lower reported capital ratios than overseas peers with comparable capital strength."
Byres said APRA’s "robust" capital framework improves the quality and quantity of the capital held by banks, but makes international comparisons more complex.
And, he conceded that 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.
Argument doesn't stack up
Interestingly, some market participants don't buy the argument that APRA is a hard regulator and imposes rules on Australian banks that are tougher than overseas regulators.
They simply don’t believe it stacks up.
They are however pleased to see the banking regulator having a crack at the comparison issue.
Broadly, speaking, the APRA discussion paper outlines two general approaches.
Under one approach, banks 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.
Under a second approach, APRA said it would change the way banks 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.
“International capital comparisons are at the heart of Australia’s unquestionably strong banks,” argues Graham Andersen, chief executive of Australian Mortgage Marketplace.
“Any reform by APRA that leads to greater transparency and comparability must be a sizeable improvement for the market," he said
Andersen thinks APRA should choose the second approach and set capital rules at Basel Pillar 1 levels with all adjustments under Pillar 2 fully disclosed.
"APRA changing Pillar 1 rules does not do Australia any favours when trying to compare internationally”
“However, as other country’s regulators do not disclose Pillar 2 adjustments, the market can never directly compare capital across jurisdictions and must rely on the veracity of all regulators.”
In essence, the Basel framework has three Pillars. Pillar 1 is the basic minimum capital requirements whilst Pillar 2 allows local regulators (like APRA) to adjust minimum capital requirements as they see fit for the circumstances. In which case its not possible to directly compare Australian banks’ capital requirements with international banks by adjusting APRA’s Pillar 2 requirements to minimum Pillar 1 capital requirements.
APRA said it 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.
“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,” Byres said.