Australia overhauls bank capital rules to withstand stress

Melbourne

AUSTRALIA'S prudential regulator has overhauled its bank capital requirement rules with fresh guidelines aimed at ensuring the institutions can operate better during periods of stress.

Major banks will set their own capital benchmarks from 2023 that will depend on how risky their lending is, the Australian Prudential Regulation Authority said in a statement on Monday (Nov 29).

Still, the regulator expects them to operate with tier one capital ratios above 11 per cent when the rules come into effect, slightly higher than the threshold under the current framework.

The banks won't need to raise new funds as they're already well capitalised to meet the new requirements, APRA said.

"Capital is the cornerstone of the banking system's safety and stability," PARA chairman Wayne Byres said in the statement. "Although Australia's banking sector is already strongly capitalised by international standards, the new capital framework will help ensure it stays that way."

The framework caps four years of regulatory efforts to ensure the country's largest banks can withstand any economic downturn and meet the Basel III standards that come into force in 2023.

The changes include an expanded use of buffers, rather than raising risk weights, allowing banks to absorb losses and continue lending in periods of stress without breaching minimum requirements, PARA said.

"The fact that Australian banks already have the capital needed to meet the Basel standards, without the need for lengthy transitional periods and phase-in arrangements that will be needed in many other countries, is evidence of the underlying strength of the Australian banking system," Byres said. BLOOMBERG