Australian Banks Well Positioned for Basel III, Says Fitch

Fitch Rating says that Australian banks are generally well positioned to meet new regulatory requirements as set out by the Basel III framework and interpreted by the Australian Prudential Regulation Authority (APRA).

“Australian banks are already largely compliant with the new capital rules, although importantly, regulatory capital ratios will continue to be lower than under a fully harmonised Basel III framework due to APRA’s conservative interpretation of the rules,” said Tim Roche, director in Fitch’s financial institution group. “The new liquidity rules pose a greater challenge, although ultimately this should be surmountable.”

The report notes that for Australian banks the most difficult component of the new rules is the net stable funding ratio (NSFR). This is due in large part to the high level of long-term lending the banks have on their balance sheets. However, the long implementation timeframe – the NSFR will not be fully implemented until 1 January 2018 – should provide sufficient time for adjustment.

The other main component of the liquidity rules, the liquidity coverage ratio (LCR), is, in Fitch’s view, less of a challenge following the announcement that the Reserve Bank of Australia will establish of a committed liquidity facility on 1 January 2015. This facility, which is permitted under Basel rules for jurisdictions such as Australia with insufficient qualifying high-quality liquid assets, will act as a backup source of liquidity; APRA will require banks firstly to manage liquidity on-balance sheet to the extent possible.

While the liquidity rules will be implemented in line with the Basel timeframe, APRA has accelerated the implementation of some segments of the capital rules, reflecting its confidence that banks will have little problem meeting them. Instead of staggering implementation over a period of several years, the new minimum capital requirements and the full 2.5% capital conservation buffer will apply in full from 1 January 2013 and 1 January 2016, respectively.

Some smaller areas of the Basel framework, such as counterparty credit risk, will be addressed by APRA in future discussion documents.


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