The Australian Prudential Regulation Authority has put authorised deposit-taking institutions on notice that it expects them to be fully compliant with its revised capital framework when it takes effect in January 2023.

Yesterday, the banking regulator sent out a timeline for implementation of the revised framework. Over the next 18 months, it will release the final standards and practice guides, conduct a data study and hold regular workshops with industry.

Key changes include increasing the size of regulatory capital buffers, implementing more risk-sensitive risk weights, greater transparency and applying a proportionate approach to small ADIs.

Buffers will be increased by including a default level of the countercyclical capital buffer of 100 basis points or risk-weighted assets.

And for ADIs using the internal ratings-based approach to determine their capital requirements, the capital conservation buffer will be increased from 250 bps to 400 bps.

The introduction of more risk-sensitive risk weights will focus on residential mortgages. APRA said that given the extent of mortgage lending on Australian banks’ balance sheets, it believes a more risk-sensitive approach is warranted.

It will do this by having additional segmentation by loan purpose (owner occupier or investor) and repayment type (principal and interest or interest-only).

APRA will improve transparency and comparability by aligning its standards with the internationally agreed Basel III framework.

The proportionate approach involves applying a simplified framework to ADIs with less than A$20 billion of total assets. This should reduce their regulatory burden.

APRA aims to enhance competition by implementing a floor to limit the capital benefit of IRB ADIs relative to the capital requirements of ADIs using the standardised approach, and more generally limiting the differences between the IRB and standardised outcomes.