APRA releases final Basel III capital reform package

The Australian Prudential Regulation Authority (APRA) has today released a final set of prudential standards and reporting standards that give effect to major elements of the Basel III capital reforms in Australia.

As well as the final standards, the package includes a response to submissions on APRA’s proposals for the four prudential standards, released in draft form in March 2012, and the two reporting standards, released in draft form in June 2012. APRA’s consultations on the Basel III capital reforms began with the release of a discussion paper outlining its broad approach in September 2011.

The Basel III capital framework was introduced by the Basel Committee on Banking Supervision in December 2010 to raise the quality and level of capital in the global banking system.

The key features of the Basel III capital reforms that will apply to authorised deposit-taking institutions (ADIs) in Australia include:

• a new definition of regulatory capital under which common equity is the predominant form of Tier 1 capital;
• a stricter approach to regulatory adjustments under which most deductions from capital are to be from Common Equity Tier 1 capital;
• an increase in the minimum amounts of capital that ADIs must hold against the risks they face: Common Equity Tier 1 Capital must be at least 4.5 per cent of risk-weighted assets and the Tier 1 Capital ratio at least 6 per cent, an increase of 2.5 and 2.0 per cent, respectively, over the existing minima;
• a new capital conservation buffer of 2.5 per cent that places increasing constraints on capital distributions where an ADI’s capital level falls within the buffer range;
• a countercyclical buffer of up to 2.5 per cent that will apply when excessive credit growth and other indicators point to a system-wide build up of risk; and
• a simple, transparent leverage ratio to help contain the build up of leverage in the banking system.

APRA Chairman Dr John Laker said that the stronger Australian banking system that will emerge from the Basel III reforms will be better placed to absorb future shocks, whatever their source.

‘Starting from a sound and strongly capitalised position, ADIs in Australia are well placed to meet the Basel III timetable, which APRA has accelerated in some areas. In APRA’s view, any impact of the Basel III capital reforms on the overall funding costs of ADIs would be a very modest insurance premium for a safer banking system. The cost of banking system crises in the United States and Europe are plain for all to see.’

Other prudential and reporting standards incorporating new counterparty credit risk requirements and other elements of the Basel III capital reforms will be released in November 2012.

The full suite of prudential standards, reporting requirements and prudential practice guides are to come into effect from 1 January 2013.

The package released today is available on the APRA website.