APRA chairman Wayne Byre has stressed the significance of capital ratios as a measure of a bank’s financial health.
In a speech at the RMA Australia CRO Forum on Tuesday, Mr Byres spoke about the role of internal models in regulatory capital calculations.
“While Basel III has done much to ensure the numerator of the capital ratio is a genuine measure of a bank’s capacity to absorb loss, doubts about the reliability of risk measurement in the denominator mean that the resulting ratios lack credibility as a reliable measure of financial strength,” he said.
“So as it stands, the future of internal models in the regulatory framework is somewhat in the balance.”
APRA’s preference is to find ways to strengthen current risk-based regime, Mr Byres said.
“There are many benefits from a risk-based capital system and we don’t want to see the baby thrown out with the bathwater,” he said.
Basell III was introduced to reduce the probability of bank failure, Mr Byres noted, adding that it does not guarantee that banks will not fail.
His comments come after a fresh round of submissions to the Financial System Inquiry touched on the issue of capital requirements for banks considered ‘too big to fail’.
Smaller lenders have called for a level playing field that would see the majors hold the same amount of capital against residential mortgages as their competitors.
“The implicit guarantee provided to the major banks is giving them a funding advantage over the rest of us,” People’s Choice Credit Union chief executive Peter Evers told Mortgage Business.
“It is not fair at the moment – it’s imbalanced.
“The majors have such a substantial advantage that, tied to their market power, they are just compressing what would otherwise be genuine competition,” he said.