APRA has released an Information Paper on its international banking capital comparison study and likely changes to banking capital requirements.

The study confirms APRA’s previous analysis that the Australian major banks are well-capitalised, but do not have capital ratios, when measured on a more consistent basis, that position them in the top 25% internationally (compared to 98 banks in 21 countries).

The results of the study will be taken into account when APRA determines its approach for setting future bank capital requirements. While APRA is fully supportive of the Financial System Inquiry’s recommendation that Australian ADIs should be “unquestionably strong”, it does not intend to tightly tie that definition to a benchmark based on the capital ratios of foreign banks.

APRA proposes a two-stage process as follows:

• APRA intends to announce its response to the FSI’s recommendation regarding mortgage risk weights shortly. This will likely involve an increase in required capital for residential mortgage exposures of the major banks; and
• other changes will depend on clarity on the deliberations of the Basel Committee (unlikely to be before end-2015).

According to APRA:

“Based on the best information currently available, APRA’s view is that the Australian major banks are likely to need to increase their capital ratios by at least 200 basis points, relative to their position in June 2014, to be comfortably positioned in the fourth quartile over the medium- to long-term…..Furthermore, this study has focussed on the Australian major banks; the impact of any future policy adjustments, if any, are likely to be less material for smaller ADIs.”