APRA has clarified its position on the different approaches it will take to banks dipping into their regulatory capital buffers and their management targets under capital adequacy rules that take effect in January next year.
Higher capital buffers are the key change to the bank capital framework (APS 110), which APRA said will provide more flexibility during periods of stress. ADIs will also be expected to maintain an adequate management target above regulatory capital buffers to allow for business growth, volatility and dividend policy.
APRA said operating within the regulatory capital buffer range will not be a breach of prudential requirements, although constraints on profit distributions may take effect. ADIs operating with capital ratios in the buffer range will need to get APRA agreement on a capital restoration path back out of that range.
The regulator said it does not consider a management target in the same way it looks at a regulatory minimum or buffer. No constraints on distributions will be placed on an ADI for falling below its management target range.
Yesterday, APRA released a raft of documents related to the revised capital adequacy rules and credit risk capital requirements. They include responses to submissions on bank capital guidance and practice guides covering capital adequacy and credit risk.
The regulator has also initiated consultation on changes to standards covering securitisation, counterparty risk and liquidity that arise from the capital adequacy changes.
Under the capital adequacy rules that will apply from the start of 2023, for banks using the standardised approach to credit risk, minimum capital of 8 per cent will be made up of a 4.5 per cent common equity tier 1 minimum, a 2.5 per cent capital conservation buffer and a 1 per cent countercyclical capital buffer.
For banks using internal models, minimum capital of 9.25 per cent will be made up of a 4.5 per cent CET1 minimum, a 3.75 per cent capital conservation buffer and a 1 per cent countercyclical capital buffer.
The major banks will have the addition of a 1 per cent domestically systemically important bank (D-SIB) buffer, taking their minimum capital to 10.25 per cent.
Under the current standard, the capital conservation buffer is 2.5 per cent for all banks and 3.5 per cent for the major banks. Under the new rules standardised banks will have buffers of 3.5 per cent and the major banks 5.75 per cent.
APRA said it expects the major banks to operate with CET1 ratios above 11 per cent, once their own targets are taken into account.
APRA has set the countercyclical capital buffer at 1 per cent as a baseline but may vary it from zero to 3.5 per cent.
ADIs must get APRA’s approval for any planned reduction in capital, such as a share buyback or where dividends exceed after-tax earnings.
The other key feature of the revised standard is change to the level of capital required to be held for different types of loans. APRA has increased capital for residential mortgages relative to other asset classes, given the high concentration in this asset, and created greater distinction