Australia's regulator raises bank capital ratios to 10.5 percent

by NZ Adviser19 Jul 2017

(Bloomberg) -- Australia’s biggest banks will have to hold more capital under fresh guidelines from the prudential regulator aimed at ensuring the institutions are “unquestionably strong.’’

The four major banks -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, Westpac Banking Corp., and National Australia Bank Ltd. -- will have to have tier one capital ratios of at least 10.5 percent by Jan. 1, 2020, the Australian Prudential Regulatory Authority said in a statement Wednesday. The average across the banks in 2016 was 9.85 percent, according to Morgan Stanley calculations.

APRA expects the four major banks will have to increase capital ratios by about 100 basis points above their December 2016 levels. Other banks using standardized models to assess risk will see minimum requirements increase by about 50 basis points.

The decision marks a further ratcheting up of regulatory efforts to ensure the country’s large lenders can weather any downturn, particularly in the property market. In 2015, the big banks collectively raised A$20 billion ($15.8 billion) in new capital after the regulator increased the amount the banks had to hold against potential home-loan losses. 

“APRA’s objective in establishing unquestionably strong capital requirements is to establish a banking system that can readily withstand periods of adversity without jeopardizing its core function of financial intermediation for the Australian community,” Chairman Wayne Byres said in a statement.

The banks have been strengthening their capital positions ahead of the APRA announcement, mainly by shedding riskier assets, according to analysts at Deutsche Bank AG. “The banks have given themselves a good head start,” analyst Andrew Triggs wrote in a May 12 note.

APRA said it intends to release a further discussion paper later in 2017 addressing “the structural concentration of exposures to residential mortgages.”

Home loans account for more than 60 percent of domestic bank lending in Australia and the regulator has grown concerned that existing capital rules do not reflect this concentration of lending and risk. Property prices in the country’s biggest cities have soared in recent years, stoking fears of a house price bubble.

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