19 July 2017
Media Release - #2017064, 2017

Strengthening financial stability – APRA release on unquestionably strong capital ratios

The Government welcomes APRA’s decision today to increase the level of capital that banks are expected to hold to be considered ‘unquestionably strong’. The Government supports APRA’s independent view on capital strength, which will further strengthen Australia’s financial resilience.

This delivers on the Government’s commitment in response to the Financial System Inquiry’s key recommendation that Authorised Deposit-taking Institutions (ADI) capital standards are unquestionably strong (Recommendation 1).

It is imperative that our banking system is unquestionably strong as it underpins some of the biggest decisions we make, including buying a home or starting a business. Capital is a bank’s first line of defence against unexpected losses and the key safeguard of the banking sector’s stability.

To achieve an unquestionably strong level of capital, APRA has concluded that it will be necessary to raise minimum capital requirements by the equivalent of around 150 basis points for ADIs that use the internal ratings-based approach to credit risk (the major banks and Macquarie) and around 50 basis points for ADIs that use the standardised approach to credit risk.

The increased requirements will put Australia’s capital framework at the forefront of international best practice and help ensure the financial system can endure future external shocks. The additional capital requirements only impact Tier 1 capital, and therefore do not impact the calculation of the Major Bank Levy which excludes Tier 1 capital.

ADIs are well placed, where they do not already meet these new benchmarks, to make up the shortfall by the required deadline of January 2020. This is due to APRA strongly encouraging banks to steadily accumulate capital over the past few years, an effort the Government has supported.

Today’s announcement should not significantly impact loan pricing or consumers’ ability to access finance. APRA envisages that the unquestionably strong capital ratios can be met by 2020 and that the major banks should be able to meet the additional capital requirements from retained earnings, without significantly affecting business growth plans, dividends policies or undertaking equity capital raisings.

While APRA’s decision comes before the finalisation of international capital standards (Basel III), it is consistent with the likely outcome of global reforms. The Government supports APRA moving forward with this announcement ahead of the continued uncertainty as to the timetable for finalisation of Basel III.

APRA has always maintained a prudential framework that is above the international minimum, and the resultant resilience in the Australian financial system was a key reason for Australia’s successful navigation of the global financial crisis.