Faster, Higher, Stronger: APRA responds to Basel III finalisation

Recently the Australian Prudential Regulation Authority (APRA) released two important consultation papers. The first paper outlines the regulator’s proposed revisions to the risk-based capital requirements for authorised deposit taking institutions (ADIs) in regards credit, market and operational risk. The revisions represent APRA’s response to the final calibrations to the Basel III framework (announced in December 2017), as well the Australian Government’s requirement that Australian ADIs have “unquestionably strong” capital. The second paper outlines how the leverage ratio requirement will be implemented in Australia. As outlined below, APRA’s proposals are in many respects faster, higher and stronger than Basel standards.

Faster, higher, stronger


  • The planned commencement date for the new capital framework in Australia is 1 January 2021 (one year earlier than BCBS deadline for Basel III) and there will not be a five year phase of the 72.5% output floor (it too will commence 1 January 2021).
  • The leverage ratio will be implemented in one step on 1 July 2019 (2.5 years earlier than the BCBS’ 1 January 2022)


  • In a number of instances APRA is proposing higher, sometimes significantly higher, risk weights compared to Basel III. For example, APRA is proposing a flat 100% risk weight for credit card exposures, whereas Basel III allows for a weighting of 45% or 75% depending on customer. Basel III moves unconditionally cancellable commitments from zero to 10%, whereas APRA proposes to move from zero to 20%. Examples such as these can be found throughout the document.
  • Basel III applies a leverage ratio of 3% with higher rates for globally systemically important banks (no Australian bank currently sits in that category). APRA is proposing that all ADIs using an internal ratings based (IRB) approach will be subject to a 4% minimum leverage ratio requirement, while 3%, will apply to standardised ADIs.


  • Basel III creates a new risk category for mortgages whose repayment is “materially dependent” on cash flow from the property. APRA notes that for both simplicity and to reflect the conditions in the Australian mortgage market, all interest-only loans, loans for investment purposes and SME residential-secured loans will fall into this higher category. APRA explains that this reflects ongoing government and regulatory concerns about the suitability of these loans and firm’s lending practices, as well as the potential prudential and financial stability risks arising from ADI’s having almost 60% of their loan portfolio in residential mortgages in an environment of “high household debt, high property prices, weak income growth and strong competitive pressures among lenders”.
  • The “unquestionably strong” mandate from the 2014 Financial Services Inquiry remains in place, however APRA does not see the need for an increase in the quantum of capital in the system. In other words, its current minimum 10.5% requirement will see the ratio adjusted accordingly, but without impacting the quantum of capital.

Except for:

  • One notable exception to the above ethos that runs throughout the rest of the paper is in terms of market risk with APRA stating it will align with the Basel 2022 proposed timetable, and “will work with ADIs to ensure that there is a sufficient implementation timeline should it proceed with implementation” (emphasis added).

Next steps

Based on feedback from ADIs, as well as a quantitative impact study, APRA will calibrate the overall impact of risk weights such that they meet the higher benchmarks for ‘unquestionably strong’ capital as set out in APRA’s July 2017 information paper.

A third consultation paper is planned for release in second quarter of the year on potential adjustments to the overall design of the capital framework to improve transparency, international comparability and flexibility.

APRA will progressively release more detailed proposals through draft revised prudential and reporting standards, commencing in the second half of 2018.


Australian ADIs face a busy few years of reviewing and re-categorising assets, re-assigning (on an ongoing basis) the new risk weights proposed by APRA and recalibrating capital frameworks. And it looks they will have to do this earlier than their overseas peers, and also while dealing with a comprehensive Royal Commission into poor culture and conduct in industry. Certainly a (continued) challenging time ahead for ADIs.

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