Beware the unintended banking effect

By Stephen Bartholomeusz

Partly due to the relatively conservative nature of their asset bases but also to the conservative approach adopted by the Australian Prudential Regulation Authority, the major banks already hold more high-quality capital than most of their international peers, face a further one percentage point capital surcharge in 2016 because of their “too-big-to-fail” status and are ahead of most systems and the Basel Committee’s timelines in implementing new and more conservative international prudential settings.

The majors try to calculate their “real” internationally-harmonised common equity tier one capital (CET1) ratios, which on their numbers says the average difference between the ratio produced using APRA’s approach and the Basel committee’s framework — the amount to which APRA’s rules understate their ratios relative to the international standards — is about 235 basis points.

According to APRA’s submission to the inquiry, the difference is actually more like 190 points – a CET1 ratio under the international standards of 10. 17 per cent versus 8. 28 per cent under its own – with the major differences the definitions of capital and floors for loss-given-default estimates for residential mortgage exposures under their advanced internal ratings approach to evaluating credit risk.

Read more here: Business Spectator


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