SYDNEY, March 16 -- Australian Prudential Regulation Authority issued the following media release:
The Australian Prudential Regulation Authority (APRA) will consult on a package of reforms to bank capital and liquidity settings aimed at maintaining the resilience of Australia's financial system and ensuring it remains well-positioned to absorb shocks and respond to periods of turbulence.
The proposed changes follow several years of heightened geopolitical and market volatility that have underscored the importance of maintaining robust prudential settings so that banks are prepared to withstand external disruptions.
Having recently reviewed its liquidity and capital framework to ensure it remains fit-for-purpose, APRA has identified opportunities to uplift its liquidity settings to bring them in line with international practice, while making the capital framework more risk sensitive.
The package of reforms, outlined today in a keynote speech by APRA Chair John Lonsdale, will be progressed through separate workstreams addressing liquidity, credit and market risk.
Collectively, the proposals are designed to be broadly cost neutral across the banking industry, while small banks with more stable funding sources are expected to see some cost benefits from the liquidity changes.
The proposals include:
* Changes to the liquidity framework for the largest banks, including consideration of a new Pillar 2 liquidity framework to address risks not covered by existing Liquidity Coverage Ratio minimum requirements. These will support APRA's supervisory focus on liquidity risk and bring policies into line with international practice. For smaller banks, APRA intends to consult on a more risk-sensitive liquidity risk framework to incentivise more robust practice. APRA expects the changes to lead to cost savings for small banks that rely on more stable funding.* Targeted amendments to the standardised capital framework to better align capital requirements with underlying risk, which is expected to reduce overall capital requirements for some banks. APRA's key areas for focus will include high-quality lending to critical infrastructure projects, corporates without a credit rating and residential property development. The planned changes have the potential to positively impact business lending and investment.* Implementation of a simplified approach to the Basel Committee's Fundamental Review of the Trading Book (FRTB), which will better reflect risks in Australia's banking system and will materially reduce compliance costs compared with full implementation.
Mr Lonsdale said: "As a proactive, risk-based regulator, we are constantly assessing our settings to ensure they remain fit-for-purpose as the operating environment evolves.
"While our bank capital framework is unquestionably strong, our liquidity framework has not kept up with international practice and needs to be uplifted. We often say that capital is the cornerstone of a bank's financial resilience, but liquidity is just as important, especially in a crisis when banks may need to rapidly source funds.
"Although this work has been in progress for some time, the renewed instability in the Middle East is a timely reminder of why a safe, stable and resilient financial system is so important to support lending, investment and jobs. At the same time, we are mindful of Australia's ongoing productivity challenges, and we remain committed to striking the right balance between safety and stability, and considerations such as competition and efficiency.
"The proposed changes to liquidity and capital settings I've outlined today - tighter liquidity requirements and increased risk sensitivity on capital - strike the right balance between improving efficiency and retaining resilience. These are settings that will help to ensure our banking system remains unquestionably strong, stable and robustly liquid during global challenges."
APRA will consult on the package in stages, beginning with consultation on changes to standardised risk weights for credit risk in the first half of this year.
A letter to industry with a detailed outline of APRA's proposed reforms and indicative consultation timetable is available at: APRA's roadmap for capital and liquidity reforms for authorised deposit-taking institutions (ADIs).
Disclaimer: Curated by HT Syndication.
