APRA yesterday announced its assessment on the additional capital required for the Australian banking sector in order for their capital ratios to be considered “unquestionably strong”. In its assessment, APRA focussed on Common Equity Tier 1 (CET1) capital requirements, given it represented the highest quality of capital and is typically referred to by markets when assessing the strength of an approved deposit-taking institution (ADI).
In its assessment APRA stated its view is the four major Australian banks will need to have CET1 capital ratios of at least 10.5% to meet its “unquestionably strong” definition. As a result of this assessment, APRA will introduce prudential standards to achieve this outcome by effectively increasing requirements for the banks by the equivalent of around 150 basis points (bps). For all other banks and ADIs, the effective increase in capital requirements to meet the “unquestionably strong” benchmark will be around 50bps.
APRA expects all banks and ADIs to meet the new benchmarks by 1 January 2020.
As at December 2016, the average CET1 capital ratio of the four major banks was just above 9.5%, which is 1% above the minimum regulatory requirement. CBA had the lowest ratio at 9.6%, while Westpac (10%), ANZ (10.1%) and NAB (10.1%) all had very similar ratios.
Bearing in mind that the four major banks have, on average, already substantially increased their CET1 capital ratios since 2014, the additional 100 basis point increase will mean that those banks will have, on average, increased their CET1 ratios by the equivalent of more than 250bps since the release of the Financial System Inquiry report in 2014.
The major banks have so far taken the news in their stride. CBA chief financial officer (CFO) Robert Jesudason said, “CBA is well positioned to meet this new capital benchmark”, while ANZ advised it was comfortable with its CET1 capital position. Meanwhile NAB Group CFO, Gary Lennon said, “NAB is well placed to respond to these new requirements” while Westpac’s CFO stated “Westpac is well positioned to meet this new benchmark”.