The Australian Prudential Regulation Authority (APRA) has released a final set of prudential standards and reporting standards that give effect to major elements of the Basel III capital reforms in Australia.

The Basel III capital framework was introduced by the Basel Committee on Banking Supervision in December 2010 to raise the quality and level of capital in the global banking system.

The key features of the Basel III capital reforms that will apply to authorised deposit-taking institutions (ADIs) in Australia include:

•a new definition of regulatory capital under which common equity is the predominant form of Tier 1 capital;
•a stricter approach to regulatory adjustments under which most deductions from capital are to be from Common Equity Tier 1 capital;
•an increase in the minimum amounts of capital that ADIs must hold against the risks they face: Common Equity Tier 1 Capital must be at least 4.5 per cent of risk-weighted assets and the Tier 1 Capital ratio at least 6 per cent, an increase of 2.5 and 2.0 per cent, respectively, over the existing minima;
•a new capital conservation buffer of 2.5 per cent that places increasing constraints on capital distributions where an ADI’s capital level falls within the buffer range;
•a countercyclical buffer of up to 2.5 per cent that will apply when excessive credit growth and other indicators point to a system-wide build up of risk; and
•a leverage ratio to help contain the build up of leverage in the banking system.

The full suite of prudential standards, reporting requirements and prudential practice guides are to come into effect from 1 January 2013.