19 July, 2017
The Australian Prudential Regulation Authority (APRA) said in a statement that the increase in capital, which is about 100 basis points above December 2016 levels, would allow the banks to meet a benchmark of being "unquestionably strong".
"Capital levels that are unquestionably strong will undoubtedly equip the Australian banking sector to better handle adversity in the future, and reduce the need for public sector support".
Australia's four biggest banks include Commonwealth Bank of Australia, Westpac Banking Corp, Australia and New Zealand Banking Group and National Australia Bank.
Australia has a highly concentrated banking system, with the "Big Four" controlling around 80 percent of lending.
The four major banks - Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, Westpac Banking Corp., and National Australia Bank Ltd. - will have to have tier one capital ratios of at least 10.5 percent by January 1, 2020, the Australian Prudential Regulatory Authority said in a statement Wednesday.
Smaller banks that allocate capital more conservatively will need to increase their capital ratios by about 0.5 percentage points.
Capital provides a loss-absorbing cushion for banks in times of financial stress. Australia's banks have already raised tens of billions in new equity capital since the global financial crisis in response to a global push from regulators for safer banks.
"Today's announcement is the culmination of almost a decade's financial reform work aimed at building capital strength in the financial system following the global financial crisis", APRA chair Wayne Byres said.
The banks have been strengthening their capital positions ahead of the APRA announcement, mainly by shedding riskier assets, according to analysts at Deutsche Bank AG.
APRA's changes could be met by banks conducting capital raisings by issuing shares under their dividend reinvestment plans or by retaining a higher share of profits.
This trend may be reinforced when APRA releases further guidance later this year that will detail moves to rate residential mortgages as riskier than they are considered now, thus requiring more reserves to offset potential losses.
APRA said it intends to release a further discussion paper later in 2017 addressing "the structural concentration of exposures to residential mortgages".
