While significant changes to Australia's capital standards in the near future are unlikely, some refinements could be made to align them more closely with the Basel III framework.
According to a recent assessment by the Basel Committee, Australia's capital framework is overall compliant with the Basel III framework. This means that we are unlikely to see significant further changes to Australia's capital standards in the near future.
Having said this, some refinements could be introduced to those standards over the next couple of years to align them more closely with the Basel III framework.
In addition, despite Australia's more rigorous implementation of certain aspects of the Basel III framework than the Basel Committee requires, there is no indication that there will be any softening in APRA's approach in the areas where it has been assessed as more conservative.
The Regulatory Compliance Assessment Programme assessment of Australia
The Basel III global capital framework reforms were introduced by the Basel Committee on Banking Supervision, and implemented in Australia via a capital framework adopted by the Australian Prudential Regulatory Authority with effect from 1 January 2013..
On 17 March 2014, the Basel Committee released a report under its Regulatory Compliance Assessment Programme (RCAP) which assessed the extent to which the capital framework in Australia is aligned with the minimum capital standards agreed by the Basel Committee. The assessment examines the consistency and completeness of Australia's domestic capital framework including the significance of any deviations from the Basel capital framework.
The report on Australia is the eighth in a series of RCAP assessments; earlier reports have been published on China, the European Union, Japan, Singapore, Switzerland, the United States and Brazil.
Australia's compliance with the new Basel III leverage ratio, liquidity ratios and G/D-SIBs framework for systemically important banks will be assessed by the RCAP team at a later date, once these reforms have come into effect in accordance with internationally agreed phase-in arrangements.
Overall Compliant Assessment qualified by departures assessed in two areas
The RCAP assessment concluded that Australia's capital framework was overall compliant with the Basel capital framework. However, this assessment was qualified by supplementary findings that Australia's capital framework deviated materially from the Basel capital requirements in two areas:
- the definition of capital; and
- the internal ratings-based approach to credit risk.
We will cover the RCAP team's assessment of these deviations, and APRA's response to this assessment, in our next edition of Insights.
Even though these departures were assessed as material by the RCAP team, they did not affect Australia's overall compliant rating. Given that APRA has indicated that several of these departures are deliberate, it is not clear whether they will be corrected in the future or remain as permanent departures.
Further refinements to prudential standards flagged
In the course of its review, the RCAP team noted other areas where APRA's prudential standards differ from the Basel standards in immaterial ways. Notwithstanding that these departures have no material or practical effects, APRA has indicated its intention to correct them in the near future (see Annex 6 of the RCAP report).
Australia's more rigorous approach to capital
Notwithstanding the areas where Australia's capital framework falls short of the Basel capital framework, the RCAP report observed that, in a number of other areas, Australia's capital framework goes beyond the minimum Basel requirements.
For example, APRA has chosen not to permit ADIs to use the Basel III transitional arrangements regarding deductions from capital, which has resulted in a more conservative outcome for Australia.
APRA has also implemented some aspects of the Basel III capital framework ahead of the agreed timeline because ADIs in Australia were considered by APRA to be well placed to meet the new measures ahead of time.
In addition, APRA does not draw a distinction between internationally active and internationally non-active ADIs in relation to the application of the capital standards (see Annex 10 of the RCAP report for a detailed summary of the areas where APRA has adopted a stricter approach than the Basel III capital framework requires).
In its response to the assessment, APRA did not give any indication that there will be a softening in its approach in the areas where it has been assessed as more conservative.
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.