Capital ratios of Australian banks to be more conservative under Basel III: Fitch

Full implementation of the new Basel III minimum capital requirements is scheduled for 1 January 2013.

Fitch Ratings notes that the Australian Prudential Regulation Authority has indicated in a discussion paper, published 6 September 2011, that it will broadly adopt the minimum Basel III requirements relating to the definition and measurement of capital. Importantly, APRA believes Australian banks are generally well positioned to meet the new rules and has indicated an accelerated implementation timeframe for certain parts of the framework.

While broadly adopting the Basel III capital regime, APRA proposes to maintain its current approach in a number of areas where it is stricter and it has strong 'in principle' reasons to continue applying it. These exclusions include areas such as deferred tax assets, investments in non-consolidated financial institutions and investments in commercial institutions.

"In addition to a somewhat stricter stance on the definition and measurement of capital under Basel III, APRA has also indicated it will maintain its conservative risk-weighted asset calculations and continue to apply a Pillar 1 capital charge for interest rate risk in the banking book," said Tim Roche, Director in Fitch's Financial Institutions Group. "As a result, capital ratios reported by Australian banks under Basel III will likely remain more conservative than those reported by international peers."

The new rules and APRA's proposed approach improve both the quantum and quality of capital that Australian banks will be required to hold and generally appear positive from a credit perspective.

APRA has accelerated the implementation timeframe in certain circumstances - full implementation of the new Basel III minimum capital requirements is scheduled for 1 January 2013, while the capital conservation buffer will be implemented on 1 January 2016 (two and three years respectively ahead of the Basel III timetable). For the leverage ratio, APRA proposes to follow the Basel III transitional arrangements (ie an observation period from 1 January 2011, a parallel run period from 1 January 2013 to 1 January 2017 and full implementation on 1 January 2018).

APRA has indicated that following consideration of submissions related to this discussion paper, it expects to release draft prudential standards in early 2012.

Photo from Dale Gillard