Aussie banks to increase credit-risk buffer in 2023: APRA

Six years after the Australian Prudential Regulation Authority (APRA)’s then-new bank capital framework did not require Australian banks to raise additional capital to protect against macroprudential risk — given they met “unquestionably strong” benchmarks set in 2017 — APRA has made its first-ever increase to the CCyB, effective 1 January.

The countercyclical capital buffer (CCyB) will be set at a new default rate of 1 per cent of risk-weighted assets (RWA).

According to the regulator, the decision is “consistent with guidance first announced when APRA finalised the new regulatory capital framework for Australian banks in late 2021.” 

In essence, the CCyB is an additional amount of capital that APRA can require banks to hold or release at certain points in the economic and financial cycle with the aim of supporting the sector to absorb losses and supply credit, it explained.

APRA can use this macroprudential policy tool “to mitigate risks to financial stability at a system-wide level” and it had been set at zero per cent of RWA since it was introduced in 2016, it confirmed.

APRA will provide a broader update early next year on macroprudential policy settings in the context of the current risk environment, which reflects its commitment to greater transparency under its new macroprudential policy framework,” the regulator has outlined.

Global tie-in to Basel III requirements

When APRA finalised its new bank capital framework in late 2021, to “strengthen financial system resilience”, it ultimately aimed to align Australian bank standards with the internationally agreed, post-Global Financial Crisis (GFC) Basel III requirements.

As former APRA Chair Wayne Byres explained late 2021, an ‘unquestionably strong banking industry’ is central to the stability of the financial system.

“Capital is the cornerstone of the banking system’s safety and stability,” Mr Byres explained.

“It protects depositors during periods of stress, ensures banks can access funding, facilitates payments and helps banks to keep lending to their customers during good times and bad.

“Although Australia’s banking sector is already strongly capitalised by international standards, the new capital framework will help ensure it stays that way,” Mr Byres said.

At the time, Mr Byres confirmed also the new standards had been designed to ensure Australia is compliant with the internationally agreed Basel III framework, which is due to come into force around the world from 2023.

Calculation and public disclosure

As the Bank of International Settlements (BIS) - based in Basel, Switzerland, and known as the 'bank for the world’s central banks' – stated: “The Basel III countercyclical capital buffer is calculated as the weighted average of the buffers in effect in the jurisdictions to which banks have a credit exposure.”

“It is implemented as an extension of the capital conservation buffer.

“It consists entirely of Common Equity Tier 1 capital and, if the minimum buffer requirements are breached, capital distribution constraints will be imposed on the bank.

It clarified: “Consistent with the capital conservation buffer, the constraints imposed relate only to capital distributions, not the operation of the bank.

BIS added that banks must ensure that their countercyclical buffer requirements are calculated and publicly disclosed with at least the same frequency as their minimum capital requirements.

“In addition, when disclosing their buffer requirement, banks must also disclose the geographic breakdown of their private sector credit exposures used in the calculation of the buffer requirement.”

“Jurisdictional reciprocity will be applied when it comes to internationally active banks in member jurisdictions.”

[Related: APRA mulls capital buffer in lender intervention mix]