Australian Prudential Regulation Authority Finalises New Bank Capital Framework

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The Australian Prudential Regulation Authority (APRA) has finalised its new bank capital framework, designed to ensure that Australian banks maintain “unquestionably strong” levels of capital and align with the internationally agreed Basel III requirements.

Strengthening Financial Resilience

The new framework aims to strengthen financial resilience by:

• Maintaining existing high levels of capital adequacy
• Providing more flexibility and responsiveness to risks in the operating environment
• Being more risk-sensitive through increasing capital requirements for higher-risk lending and decreasing it for lower-risk activities

APRA Chair Wayne Byres noted that an unquestionably strong banking industry is central to the stability of the financial system. “Capital is the cornerstone of the banking system’s safety and stability,” he said. “It protects depositors during periods of stress, ensures banks can access funding, facilitates payments, and helps banks to keep lending to their customers during good times and bad.”

Simplified Approach for Small Banks

APRA has introduced a simplified approach for small, less complex banks (those with under $20 billion in assets and simple business models). This is because the full Basel framework may be too costly for these banks to implement, outweighing the benefits of prudential safety.

The simplified approach avoids unnecessary regulatory burden without jeopardising prudential safety. It allows smaller banks to focus on their core business activities while still maintaining strong capital levels.

Next Steps

APRA is commencing consultation on associated guidance material and will update associated reporting requirements and other related prudential standards over the year ahead to assist banks in preparing for the new framework.

The information paper and updated prudential standards are available on the APRA website.