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Australian regulator finalizes new bank capital framework

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By Alice Uribe

SYDNEY – Australia’s financial institutions regulator will not require the country’s banks to raise additional capital as part of its new, finalized system to strengthen the resilience of the financial system.

The Australian Prudential Regulation Authority released its well-reported new bank capital framework on Monday. He said he aimed to build in “unmistakably strong” levels of capital and align Australian standards with international Basel III requirements, which are expected to come into effect globally from 2023. Banks Australians are expected to implement APRA’s capital framework by January 1. 2023.

“Capital is the cornerstone of the security and stability of the banking system. It protects depositors during times of stress, ensures that banks can access financing, facilitates payments and helps banks continue to lend to their families. customers in good times and in bad times, ”said Wayne Byres, president of APRA. .

“Although Australia’s banking sector is already highly capitalized by international standards, the new capital framework will help ensure it remains so,” said Byres.

The framework, developed over four years of consultation, does not require banks to raise additional capital. APRA said Australian banks already met benchmarks set by the regulator in 2017.

As part of the benchmarks introduced in 2017, APRA required Australia’s Big Four banks to have Common Equity Tier 1 capital ratios of at least 10.5%.

Under the new framework, capital targets should be set for banks, reflecting new prudential requirements and the risk appetite of a given bank.

“APRA expects the big banks to probably operate with CET1 ratios, calculated under the new methodology above 11% from 2023,” APRA said. “The exact changes in reported capital ratios will vary among banks due to differences in risk profile, and not all should expect to see the same level of adjustments.”

“The fact that Australian banks already have the capital to comply with Basel standards, without the need for long transition periods and incremental arrangements that will be required in many other countries, is proof of the underlying strength. the Australian banking system, “says Byres.

The regulator has said it will increase capital requirements for high-risk loans and lower them for lower risks.

“This both encourages banks to lend prudently and requires more capital to be held for riskier loans which have higher probability and impact of loss,” APRA said in a briefing paper released Monday.

At the same time, APRA said it would limit differences in capital requirements between small and large banks, in order to support competition in the sector.

Under the new framework, APRA has introduced a set of simplified capital requirements that can be applied to smaller, less complex banks – those with less than A $ 20 billion ($ 14.28 billion) in assets and simple business models.

The Basel framework, APRA noted, was developed primarily for large, internationally active banks and, although widely used around the world, the cost of implementing the full framework for small banks can l outweigh the advantages of prudential security.

“Developing a simplified approach for small banks avoids unnecessary regulatory burden, without compromising prudential safety. It was designed to benefit a large number of institutions – around three-quarters of national banks will be able to take advantage of the simplified approach, ”Mr. Byres said.

Write to Alice Uribe at [email protected]