APRA urges majors to strengthen capital

Released yesterday, the regulator’s International capital comparison study was put together to address the Financial System Inquiry’s (FSI’s) recommendation that the capital ratios of Australian authorised deposit-taking institutions (ADIs) should be “unquestionably strong”.

APRA said the study compares Australia’s big four banks with a set of global peers using a range of measures to determine capital strength.

The study found that the majors are “well-capitalised”, and if measured in a manner “closer to common international supervisory practice”, APRA estimates that their Common Equity Tier One (CET1) ratios would, on average, be 300 basis points higher.

However, APRA pointed out that its adjusted ratios would not place the big four banks in the top quartile of their international peers.

“APRA’s analysis finds that, on an adjusted basis, Australia’s major banks are above the median, but not in the top (fourth) quartile for CET1 ratios; and rank similarly lower for other measures of capital adequacy (Tier 1, total capital and leverage),” the report said.

Major banks would require an increase of “around 70 basis points” in CET1 capital and “at least 200 basis points in total capital” – relative to their position in June 2014 – to be comfortably positioned in the fourth quartile over the medium to long term, according to APRA.

The regulator said it intends to announce its response to the FSI’s recommendation regarding mortgage risk weights shortly.

“To the extent this involves an increase in required capital for residential mortgage exposures of the major banks, and the banks respond by increasing their actual capital levels to maintain their existing reported capital ratios, it will have the effect of shifting these banks towards a stronger relative positioning against their global peers,” APRA said.