💡 Key insights
- Australian Prudential Regulation Authority (APRA) raised capital requirements so that major Australian banks must hold a minimum Common Equity Tier 1 (CET1) ratio of 10.5 percent under the “unquestionably strong” standard.
- The increased CET1 requirement aims to make banks more resilient by ensuring they hold sufficient high-quality capital to absorb losses and weather economic stress.
- The reforms apply different capital-buffer increases depending on bank type: large systemically important banks face a rise of roughly 150 basis points while smaller regional banks face a 50 basis-point increase.
- By embedding higher capital buffers and aligning with international standards, APRA’s revised framework supports financial-system stability, protects depositors, and strengthens banks’ capacity to continue lending and operating under adverse conditions.
On the 19th of July, APRA announced an ‘unquestionably strong’ capital requirement benchmark for all major banks. This applies to Common Equity Tier 1 capital (CET1), which is core capital, comprising issue stock and declared reserves.
By 1 January 2020, systemically important banks (SIBs) that is, the big 4 (CBA, NAB, ANZ and WBC) are required to increase their CET1 by 150 basis points (1.5%) to 10.5% while smaller, regional banks are required to increase by 50 basis points (0.5%).
As of current, the big 4 are holding more than the current capital requirements and thus they will on average only need to increase their capital holdings by 100 basis points (1.0%). Despite this, according to a respected UBS analyst, the new capital requirements will result in the big banks having up to $8 billion in capital shortfalls, $4.2 billion of which is borne by CBA. This figure could increase to $18 billion for all banks should an announcement be made regarding a further increase in mortgage risk weights, which would raise home loan rates.
Anticipating a crash?
Undoubtedly, this is one of the many layers of protection to secure Australia’s financial economy for what is becoming an uncertain housing market. Ever since the 2008-9 GFC, regulatory bodies have consistently upped-the-ante, through the Basel I, II, III and now IV policies. These efforts are now all the more important, with Australia in a more vulnerable state, especially with the end of the mining boom.
Other Implications
Following the announcement, stock prices of major banks declined with ANZ rebounding 2.7% to $29.05 on 19th July 2017. However investors’ fears have been quelled after APRA reassured that the banks would achieve the capital requirements from normal dividend payouts and retained earnings and not through substantial equity raisings or assets sales from the bank.
Let us know your thoughts on APRA’s capital requirement policies by tagging us at #lawpath or @lawpath.
