APRA directs conservatism in Australian banking
ZERO per cent, that's the level of the countercyclical buffer rate for ADIs set by APRA for the Australian banking industry.A new weapon in the armoury of central banks post-crisis, the countercyclical buffer.APRA's version of the Basel III regime features a series of capital ratios: core equity capital; an updated tier-one capital ratio; the "capital conservation buffer"; the "countercyclical buffer", and a secret APRA adjustment few banks discuss.In late 2011, APRA chief Wayne Byres, then a senior manager, spoke to a Finsia workshop.Byres said the capital conservation buffer would be "a permanent feature of the regime, applied to all and mostly applied at a constant size to all."He said of the countercyclical buffer (intended to rise at times of high credit growth): "While applied to all, it will vary in size over time. It will be announced by APRA when [it is] switched on and off."OFF is the setting for now.APRA yesterday announced that the buffer, applying from 1 January 2016, would be set at zero.Byres said the decision to set the countercyclical buffer for Australian exposures at zero per cent of risk-weighted assets was made following consultation with the Council of Financial Regulators."Based on APRA's assessment of current levels of systemic risk, including credit growth, asset prices and lending standards, APRA did not see a case for imposing a countercyclical buffer for Australian exposures at this point in time," Byres said."APRA will continue to monitor developments in a range of financial risk indicators, and will revise the determination if conditions warrant it in future," he said.APRA said the consequence of this decision is that ADIs will generally be required, from 1 January 2016, to maintain a minimum CET1 ratio of 4.5 per cent, plus a 2.5 per cent capital conservation buffer (3.5 per cent for D-SIBs) and a buffer for international exposures in jurisdictions that have set a non-zero countercyclical capital buffer rate.For some ADIs, additional capital requirements are also applied via Pillar 2 (i.e. in response to institution-specific risks and issues)."All Australian ADIs currently report CET1 ratios above these requirements," APRA said.The aggregate CET1 ratio for the banking system as at end September 2015 was 10.1 per cent, APRA said.