RBNZ and APRA see sense on bank capital

Ian Rogers

We are all one step closer to an elegant takeover by the Kiwis of Australian financial regulation.

To simplify capital calculations for banks, and in turn, capital floor calculations, APRA is proposing that risk-weighted assets of the New Zealand banking subsidiaries of banks be calculated under Reserve Bank of New Zealand rules for the determination of Level 2 group capital requirements.

“This is a simpler approach that removes the operational burden of duplicate reporting systems for ADIs with exposures subject to RBNZ capital requirements,” APRA said yesterday.

This cutting of at least a little red tape is one process behind a mostly technocratic reform of the rules on measuring and maximising the capital foundations of the Australian banking industry.

There is plenty of bank capital in the system already, or enough anyway, is the guts of APRA’s position, explained in a discussion paper: ‘Revisions to the capital framework for authorised deposit-taking institutions’.

APRA said it remains committed to its previous position that an ADI that currently meets the ‘unquestionably strong’ benchmarks under the current framework should have sufficient capital to meet any new requirements.

Changing the presentation of capital ratios “will not impact overall capital strength or the quantum of capital required to be considered ‘unquestionably strong’,” APRA said, “but instead improves comparability, supervisory flexibility and international alignment.”

There will be an increase capital ratios overall.

The “proposals will change the presentation of capital ratios” APRA said.

“This is because the denominator of the capital ratio calculation – RWA – is changing to be more aligned with the international Basel methodology, while the dollar amount of eligible capital required remains unchanged.

“All else being equal, this will increase capital ratios.”

One key reform is that the counter-cyclical capital buffer will be 1.0 per cent by default for Australian banks - up from zero.

Then the risk-weighting game will become ever more fundamental to the art of pricing and designing credit.

In the case of mortgages, for ‘Standardised ADIs’ the lowest risk weight available will be 20 per cent, down from 35 per cent now. Big banks will love this, as under their advance models they are often already below this on prime mortgages.

Most banks will also love ‘additional segmentation’ by loan purpose: owner-occupier, paying principal-and-interest, and other.

For big banks, the LGD floor (as in, loss given default) will halve to 10 per cent.

The bruise for big banks is no special treatment on recognition of lenders’ mortgage insurance.

In a nod to the crowd, APRA proposes to ease risk weights on SME loans not secured by property from 100 per cent to a 75 per cent risk weight if less than A$1.5 million in size, otherwise 85 per cent; for standardised banks, which is most. For advanced banks, the ‘Retail SME approach for lending’ will also apply at $1.5 million.

Then in one material reform to lower stress levels at the scores of sub-scale banks and credit unions, ADIs below $20 billion total assets, from 2023, can benefit from:

• flat operational risk capital charge of 10 per cent of RWA;
• no counterparty credit risk capital or reporting requirements;
• interest rate risk in the banking book requirements limited to reporting only; and
• no leverage ratio capital or reporting requirement.

To make it easy for neobanks and tiddlers, APRA will even arrange a “centralised Pillar 3
Publication” for these M&A candidates.

Judging by the Pillar 3s Banking Day has seen recently, this can only be to the public benefit.