APRA’s proposed capital rules should boost competition

The banking regulator says its proposed capital rules will ‘materially narrow’ the gap in capital requirements between large and smaller banks.

APRA chairman Wayne Byres.

The banking regulator says its proposed capital rules will boost competition, as the changes “materially narrow” the gap in capital requirements between large and smaller banks.

The Australian Prudential Regulation Authority on Wednesday released a letter to authorised deposit-taking institutions, updating its position on capital policy settings which come into effect in 2023.

The regulator wants to wrap up the consultation phase for the reforms – which are aimed at strengthening the financial resilience of the sector – by November this year.

APRA said the changes will introduce higher capital buffers and provide “greater flexibility for periods of stress”.

The letter to banks was signed off by APRA’s policy general manager Gideon Holland.

Regional and smaller banks have often raised concerns about the levels of capital they have to hold against loans, versus their bigger rivals.

The Customer Owned Banking Association has previously warned of a competitive distortion, as major banks using the internal ratings-based (IRB) approach have had advantages over smaller competitors.

“The proposed reforms to the capital framework will, in APRA’s view, enhance competition in the industry,” APRA’s letter said.

“The reforms include higher capital buffer requirements for larger banks that use the IRB approach, and a new floor on IRB risk weights which will limit the benefits of internal models relative to smaller banks on the standardised approach.

“The net effect of these and other changes will be to materially narrow the gap in capital requirements between the IRB and standardised approaches.”

But APRA stopped short of reducing capital requirements for lower-risk home loans for smaller banks, as that would put its requirements below minimum international standards set by the Basel Committee on Banking Supervision.

“The gap in capital requirements that does remain between the IRB and Standardised approaches reflects, in APRA’s view, the better risk sensitivity of advanced modelling,” the regulator said.

APRA is sticking to an initial proposal to increase the capital conservation buffer (CCB) – which is an amount above regulatory capital set aside to be utilised in times of stress to absorb losses – for large banks to 4 per cent from 2.5 per cent.

The CCB for smaller financial institutions will remain at 2.5 per cent.

The regulator is setting a base level for the countercyclical capital buffer of 1 per cent of risk-weighted assets for all banks.

APRA also plans to refine capital requirements for higher-risk mortgage lending through changes to the definition of long-term interest-only loans.

Separately, APRA this week reinstated its position on banks offering support to borrowers by way of loan repayment deferrals, due to Covid-19 lockdowns. Banks will not be required to treat ­deferred payments as arrears, after the regulator moved back to pre-March 31 settings.