APRA has made a significant change to its capital framework for banks, following consultation with the Council of Financial Regulators.
The prudential regulator announced last week that the countercyclical capital buffer applying to the Australian exposures of authorised deposit-taking institutions (ADIs) will be set at zero per cent from 1 January 2016.
The consequence of this decision is that banks will generally be required to maintain a minimum Common Equity Tier One (CET1) capital ratio of 4.5 per cent, plus a 2.5 per cent capital conservation buffer (3.5 per cent for domestic systemically important banks) and a buffer for international exposures in jurisdictions that have set a non-zero countercyclical capital buffer rate.
APRA chairman Wayne Byres said that based on the regulator’s assessment of current levels of systemic risk, including credit growth, asset prices and lending standards, it did not see a case for imposing a countercyclical buffer for Australian exposures at this point in time.
“APRA will continue to monitor developments in a range of financial risk indicators, and will revise the determination if conditions warrant it in future,” he said.
The role of the countercyclical buffer within the Basel III reforms is to ensure that banking sector capital requirements take account of the macro-financial environment in which ADIs operate, according to APRA.
“It can be deployed by national jurisdictions when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses,” the regulator said in a statement.
“The buffer can be reduced or removed when system-wide risk crystallises or dissipates. For an ADI with international exposures, the countercyclical buffer applicable to its business will be the weighted average of the countercyclical buffers applied by the jurisdictions in which it operates.”