Here’s how many billions of dollars banks will need to satisfy APRA’s new capital rules

Breaking Bad / AMC

APRA clarified its definition of “unquestionably strong” capital requirements for Australian banks today.

The verdict? “The four major Australian banks need to have CET1 capital ratios of at least 10.5% to meet the ‘unquestionably strong’ benchmark,” APRA said.

The regulator said Australian financial institutions are expected to meet the new requirements by January 1, 2020.

Following the announcement, leading bank analyst Jon Mott from UBS ran some preliminary numbers on where Australia’s big 4 banks stand in respect of their current capital positions.

Given that APRA has imposed a minimum CET1 ratio of 10.5%, Mott based his figures on the assumption that each of the big banks will adopt a CET1 ratio of 10.75%.

Here’s the current shortfall:

Source: UBS

The table shows that ANZ is currently best placed to meet the new capital requirements, while Commonwealth Bank has the biggest shortfall.

Mott highlighted the line in this morning’s announcement which said “APRA encourages ADIs to consider whether they can achieve the capital benchmarks more quickly”.

“This is consistent with our view that game theory implies the banks will raise this additional capital sooner rather than later,” he said.

Mott’s initial calculations don’t include any change to APRA’s ruling on how much risk-weighting the major banks need to apply to mortgage assets.

Currently, Australian banks apply a risk-weighting for mortgage assets of 25% in the calculation of Tier 1 capital ratios.

APRA said that any changes in the risk-weightings of mortgage related assets as part of capital adequacy calculations will be confirmed later this year, pending the completion of international banking reforms.

Should the risk-weighting be increased, it will increase the total capital shortfall and the big banks will be required to further strengthen their capital positions.

Mott ran a scenario analysis in the event that APRA enforces a 5% increase in risk-weightings to 30%, and it significantly increases the projected shortfall:

Source: UBS

In summary, Mott said that APRA’s definition of “unquestionably strong” capital levels was broadly consistent with expectations.

This morning’s announcement will take the total additional capital raised by the big four banks to around $40 billion since stricter capital requirements were introduced in 2014.