Must be Mad Monk Monday for Bankers
Bank capital strength understated: Fitch
Australian Financial Review Jun 19 2016 3:57 PM
Jonathan Shapiro
The strength of Australia's banks is being understated relative to their global peers because of the local regulator's tougher application of global banking rules, says credit rating agency Fitch Ratings.
In a brief report, Fitch said the Australian Prudential Regulation Authority's "conservative implementation" of the Basel capital framework meant the "extent of improvement" in banks capital ratios is understated.
The ratings agency said that the main differences in comparing Australian banks to its global peers arises because APRA counts many factors, such as interest rate hedging, towards its "Pillar I charge", which determines minimal capital ratings, rather than a lower ranking Pillar II assessment.
Fitch also said that an increase in the minimum assumed loss from a mortgage default to 20 per cent in bank's internal models resulted in higher risk weighted assets.
An increase in the loss given default floor to 25 per cent effective from July would further increase risk weights and distort the Tier I capital ratio (which measures how much capital the bank holds relative to its risk weighted capital).
"The conservative implementation makes it difficult to compare capital across jurisdictions, which is unlikely to change after adjustments to global rules are finalised later in 2016," Fitch said.
However, the rating agency said it expected regulatory capital requirements to increase further as APRA responds to further anticipated changes to the Basel framework, but said the requirements and the timeframe should allow the banks to "internally generate the required capital".
The relative strength of the bank's capital positions compared to global peers is of more than trivial importance. The David Murray-led financial system inquiry concluded in late 2014 that the nation's banks capital positions should be "unquestionably strong", which was defined as being among the top quartile globally in terms of capital ratios.
In 2015, APRA conducted a study to compare Australia's banks capital ratios to other jurisdictions and concluded that capital ratios are about 3 percentage points higher if globally consistent measures were applied.
The regulator also said the banks would require an additional 2 percentage points of capital to sit comfortably within the top quartile.
The complexity in measuring and comparing the capital strength of banks in different jurisdictions has led to controversy – with banks and regulators often at odds as to how favourably they rank.
The Basel Committee has made "main goals" to "address excessive variability in risk-weighted assets modelled by banks", secretary-general Bill Coen said in a speech at the AFR's Banking & Wealth summit in April this year.