The 2014 Financial System Inquiry (FSI) endorsed the benefits of a strong and well capitalised banking system and recommended that APRA set capital standards such that capital ratios of authorised deposit-taking institutions (ADIs) are ‘unquestionably strong’. The Australian Government subsequently endorsed this recommendation.
The FSI’s endorsement of the benefits of a strongly capitalised banking system recognised Australia’s reliance on foreign borrowings, the need to ensure that Australia’s financial system continues to provide its core economic functions, even in times of stress, and the benefits that flow from reducing the perception of an implicit government guarantee and the associated economic inefficiency this creates.
APRA has released this information paper, which outlines APRA’s conclusions with respect to the quantum and timing of capital increases that will be required for Australian ADIs to achieve unquestionably strong capital ratios. The analysis draws on international comparisons, as suggested by the FSI, as well as other information that allows capital strength to be viewed from different perspectives.
In its assessment, APRA has focussed on the appropriate calibration of Common Equity Tier 1 (CET1) capital requirements, recognising that CET1 is the highest quality capital and therefore most likely to engender confidence in an ADI’s financial strength.
APRA has distinguished in its analysis between those ADIs using the more conservative standardised approach to capital adequacy, and those banks that are accredited to use internal models to determine their capital requirements.