APRA Explains - Capital Buffers

The below APRA Explains article builds upon this foundational explanation of the importance of capital and how it contributes to financial strength for APRA-regulated ADIs and general insurers. It gives more insight into capital buffers held by Australian banks. This is in alignment with the Basel III international regulatory reforms, developed in response to the 2007-2009 financial crisis, that aim to strengthen banks' capital, liquidity, and risk management. As part of the Basel III reforms to the capital framework introduced in 2013, APRA requires locally incorporated ADIs (other than providers of purchased payment facilities) to hold a buffer of Common Equity Tier 1 (CET1) capital, over and above each ADI’s minimum requirement, comprised of three components: The requirements for the capital conservation buffer are set out in Prudential Standard APS 110 Capital Adequacy. Guidance on the operation of the countercyclical capital buffer and on the operation of constraints on capital distributions where an ADI’s CET1 falls within the capital buffer range is set out in Prudential Practice Guide APG 110 Capital Buffers . This information paper sets out APRA's methodology for assessing which ADIs are Domestic systematically important banks in Australia (D-SIBs). APRA determined in December 2013 that the following ADIs are D-SIBs: APRA determined that the additional capital buffer for D-SIBs is 1.0 per cent of risk-weighted assets, to be held in CET1 Capital from 1 January 2016 as an extension to the capital conservation buffer. This Information Paper, the countercyclical capital buffer in Australia, sets out APRA's approach to assessing the appropriate settings for the countercyclical capital buffer: The requirements for the countercyclical capital buffer are set out in Prudential Standard APS 110 Capital Adequacy . The Basel Committee on Banking Supervision has a webpage on which any country with countercyclical capital buffer requirements, including non-Basel Committee members, may list their buffer rates. From 1 January 2018, ADIs are required to report their ADI-specific countercyclical capital buffer under Reporting Standard ARS 110.0 Capital Adequacy . APRA’s jurisdictional countercyclical capital buffer is currently set at 1 per cent of risk weight assets, effective from 1 January 2023.

Source: Original reporting via Australian Prudential Regulation Authority