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The ADI Capital Requirement

The ADI capital framework in Australia has been an evolving saga.

Earlier this week, the Australian Prudential Regulation Authority (APRA) released their response to consultations collected during the first phase of the ADI capital framework.

While there will be some changes to initial proposals based on industry feedback and the regulators own quantitative study, APRA indicated there will be no change to the Level 1 risk-weights for equity investments in subsidiary ADIs.

The release from APRA indicated that Australian ADIs already fulfil the Basel III and the Financial Inquiry (FSI) recommendation of being ‘unquestionably strong’.

“In setting out these latest proposals, APRA has sought to balance its primary objectives of implementing the Basel III reforms and ‘unquestionably strong’ capital ratios with a range of important secondary objectives. These objectives include targeting the structural concentration in residential mortgages in the Australian banking system, and ensuring an appropriate competitive outcome between different approaches to measuring capital adequacy,” APRA Chair Wayne Byres said, in the formal response to industry on the first phase of the ADI capital requirements.

With there being no need to raise additional capital, the regulator indicated the aim is ‘to reinforce the safety and stability of the ADI sector.’

APRA said that, based on feedback they have received from industry and their own study, there will be:

  • for residential mortgages, some narrowing in the capital difference that applies to lower risk owner-occupied, principal-and-interest mortgages and all other mortgages;

  • more granular risk-weight buckets and the recognition of additional types of collateral for SME lending, as recommended by the Productivity Commission in its report on Competition in the Financial System; and

  • lower risk-weights for credit cards and personal loans secured by vehicles.

The regulator indicated that the consultation processes in this space is a ‘multi-year’ project and is intended to come into effect in January 2022; however, the risk capita proposals are expected to come into focus in January 2021.

Byres said, “With regard to the impact of risk-weights on competition in the mortgage market, APRA has previously made changes that mean any differential in overall capital requirements is already fairly minimal. APRA does not intend that the changes in this package of proposals should materially change that calibration, and will use the consultation process and quantitative impact study to ensure that is achieved.”

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