Captured APRA squibs counter-cyclical capital

From Martin North:

APRA has today announced that the countercyclical capital buffer applying to the Australian exposures of authorised deposit-taking institutions (ADIs) from 1 January 2016 will be set at zero per cent.

The countercyclical buffer was included within the ADI capital framework as part of the Basel III reforms that were introduced by APRA in 2013. Although the minimum Basel III requirements were implemented from 1 January 2013, the buffer component of the framework will take effect from 1 January 2016.

The capital framework requires ADIs to hold a buffer of Common Equity Tier 1 (CET1) capital, over and above each ADI’s minimum requirement, comprised of three components:

  • a capital conservation buffer, applicable at all times and equal to 2.5 per cent of risk-weighted assets (unless determined otherwise by APRA);
  • an additional capital buffer applicable to any ADI designated by APRA as a domestic systemically important bank (D-SIB), currently set to 1.0 per cent of risk-weighted assets; and
  • a countercyclical buffer which may vary over time in response to market conditions. This buffer may range between zero and 2.5 per cent of risk-weighted assets.

The role of the countercyclical buffer within the Basel III reforms is to ensure that banking sector capital requirements take account of the macro-financial environment in which ADIs operate. It can be deployed by national jurisdictions when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses. The buffer can be reduced or removed when system-wide risk crystallises or dissipates. For an ADI with international exposures, the countercyclical buffer applicable to its business will be the weighted average of the countercyclical buffers applied by the jurisdictions in which it operates.

APRA Chairman Wayne Byres noted the decision to set the countercyclical buffer for Australian exposures at zero per cent of risk-weighted assets was made following consultation with the Council of Financial Regulators.

‘Based on APRA’s assessment of current levels of systemic risk, including credit growth, asset prices and lending standards, APRA did not see a case for imposing a countercyclical buffer for Australian exposures at this point in time,’ Mr Byres said. ‘APRA will continue to monitor developments in a range of financial risk indicators, and will revise the determination if conditions warrant it in future.’

The consequence of this decision is that ADIs will generally be required, from 1 January 2016, to maintain a minimum CET1 ratio of 4.5 per cent, plus a 2.5 per cent capital conservation buffer (3.5 per cent for D-SIBs) and a buffer for international exposures in jurisdictions that have set a non-zero countercyclical capital buffer rate. For some ADIs, additional capital requirements are also applied via Pillar 2 (i.e. in response to institution-specific risks and issues). All Australian ADIs currently report CET1 ratios above these requirements: the aggregate CET1 ratio for the banking system as at end September 2015 was 10.1 per cent.

Where an individual ADI does not hold sufficient capital to meet its aggregate buffer requirement, the ADI would be subject to constraints on its ability to make capital and bonus distributions. The distribution constraints imposed on an ADI when its capital levels fall into the buffer range increase as the ADI’s capital level approaches the minimum requirements. This encourages ADIs to maintain a sound capital buffer and provides a mechanism to ensure ADIs conserve capital, and have a strong incentive to restore their capital strength, after a period of loss.

In addition to today’s announcement on the size of the buffer, APRA has also released today:

  • an information paper, The countercyclical capital buffer in Australia, setting out APRA’s approach to assessing the appropriate settings for the countercyclical buffer;
  • a revised and final version of Prudential Standard APS 110 Capital Adequacy (APS 110) that clarifies operational aspects of the countercyclical capital buffer, following consultation earlier this year; and
  • a draft version of Prudential Practice Guide APG 110 Capital Buffers (APG 110) for consultation. The draft APG110 provides additional guidance on the operation of the capital buffers, including some worked examples.

APRA has also informed the Basel Committee on Banking Supervision of the Australian countercyclical capital buffer rate so it can be added to the list of jurisdictions’ buffers that are maintained on the Bank for International Settlements’ website.

The countercyclical buffer information paper, the draft prudential practice guide on capital buffers, and the revised prudential standard APS 110 can be viewed on APRA’s website.

Either regulators are captured or so paranoid by what they see coming down the pipe next year that they fear the implications of raising capital standards any further.

The truth is the two are now indistinguishable.

David Llewellyn-Smith
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    • mine-otour in a china shop

      oh they do something all right – that is they do what the big 4 and Macquarie tell them what to do, and they provide training for the many supervisors who go on to work from APRA to then work in those institutions.

      • The Traveling Wilbur

        It follows from your post that banks think hiring public servants is a beneficial activity. Dear dog. If that’s really true it would explain so much about how we got where we are now.

        Other than for those in a position to curry favour and influence, my experience has been that organisations see ex pub servs as something akin to a lawn ornament. Nice to have around but not particularly functional. Note: that viewpoint is not necessarily my own.

        Guess Australia is different. At least the bankers are. And dog what a lot of bankers there are in this country.

  1. Do they show where in past history they think they would have applied such a buffer and what the market characteristics were during the times when such a buffer would have applied?
    If not why not?
    How will they and we know if they are doing their job if they don’t have any guiding principples in place in advance against which to measure their performance?
    Will they consider where like with like real estate sales are growing at more than double inflation over the past 3 years and at more than inflation over 10 years (my own arbitrary example to get some discussion going)?

  2. APRA really is a joke. I have first hand experience dealing with them from a Big 4 and to be honest, they ask some soft questions and basically just lie down.

    You can’t blame the individuals at APRA, they try hard enough. The problems are:

    1. The government doesn’t truly want to regulate the banks as they know it will bring in true risk based pricing, and put the brakes on an already slowing economy
    2. They are underfunded. Literally salaries at APRA are half of what you would get in a similar role at a commercial bank. Its not going to attract the talent it needs.
    3. They are stretched too far. You will see the same analyst talking to you about personal credit lending standards and then talking to a different expert at the bank about market risk modelling.

    Just rest assured that when the economy tanks because of the un-regulated housing market, this will all come out.

    This isn’t the first or the last time APRA has been shameful. Think back a few years ago, APRA asked the LMI industry on how much they think they should hold in capital! LOLZ.