Today the Australian Prudential Regulation Authority (APRA) released a discussion paper outlining its proposed implementation of the Basel III capital reforms (as set out in Basel Committee's December 2010 paper Basel III: A global regulatory framework for more resilient banks and banking systems).

In the interests of international consistency, APRA proposes to adopt the minimum Basel III capital requirements in full except where there are strong in-principle reasons for continuing APRA's current policies. This approach will require APRA to take a stricter approach than at present in some areas but a less conservative approach in others. Perhaps the most significant deviation from the Basel III requirements is APRA's proposal to adopt an accelerated timetable for the introduction of Basel III. This and other matters raised in APRA's discussion paper are summarised below.

Key proposals

APRA proposes:

  • to adopt the Basel III minimum capital requirements and definitions of capital. Although the Basel III timetable allows for the new minimum capital requirements to be phased-in over a period of two years from 1 January 2013, APRA believes Australian authorised deposit-taking institutions (ADIs) should be able to meet the new capital requirements straight away. Accordingly, APRA proposes that all ADIs will be required to meet the following minimum requirements from 1 January 2013:
  • 4.5% Common Equity Tier 1 ratio (increased from 2% under Basel II);
  • 6.0% Tier 1 capital ratio (increased from 4% under Basel II); and
  • 8.0% total capital ratio (which remains the same as under Basel II).
  • to adopt the stricter Basel III eligibility criteria for Tier 1 and Tier 2 capital instruments. Capital instruments that fail to satisfy the new eligibility criteria will be progressively de-recognised for regulatory capital purposes in accordance with the Basel III timetable.
  • to follow the regulatory capital adjustments set out in Basel III except in certain circumstances where it believes a more conservative approach is appropriate. For example, APRA has indicated that it will continue to require capital expenses and capitalised transaction costs to be deducted from capital. APRA has also indicated it will take a stricter approach to removing the double counting of capital in the financial system and on investment in commercial institutions.
  • to introduce a capital conservation buffer in line with Basel III, which will require ADIs to hold an additional 2.5% of Common Equity Tier 1. This means that ADIs will be required to hold a minimum 7% of Common Equity Tier 1. The Basel III timetable allows for the capital conservation buffer to be phased-in from 1 January 2016 and become fully effective on 1 January 2019. However, APRA is of the view that ADIs should be able to meet the minimum Common Equity Tier 1 ratio of 7% by 1 January 2016.
  • to introduce a countercyclical buffer in line with Basel III. APRA will indicate in 2015 whether any countercyclical buffer will apply from 1 January 2016 and whether any phasing-in of that buffer is necessary.
  • to introduce the leverage ratio set out in Basel III which will apply from 1 January 2018 in accordance with the Basel III timetable.  

Consultation with industry

APRA has invited written submissions on its proposals by 2 December 2011 with a view to issuing draft prudential standards and reporting requirements for consultation in early 2012.