Bank Capital Adequacy in Australia

IMF Working Papers, January 1, 2012

Source details

Given Australia's conservative approach in implementing the Basel II framework, Australian banks' headline capital ratios underestimate their capital strengths.
Australian banks have high capital quality and have made progress in their funding profiles since the global financial crisis.
Australian banks are making good progress toward meeting the Basel III requirements, including the new liquidity standards.
Stress tests calibrated on the Irish crisis experience show that the banks could withstand sizable shocks to their exposure to residential mortgages.
Combining residential mortgage shocks with corporate losses expected at the peak of the global financial crisis would put more pressure on Australian banks' capital.
It would be useful to consider the merits of higher capital requirements for systemically important domestic banks.

Calibration: stress tests calibrated on the Irish crisis experience.
Scenario A: sizable shocks to exposure to residential mortgages — result: banks could withstand these shocks.
Scenario B: residential mortgage shocks combined with corporate losses expected at the peak of the global financial crisis — result: greater pressure on banks' capital; potential need for higher capital buffers for systemically important domestic banks.

Continue progress toward full implementation of Basel III requirements, including new liquidity standards.
Consider the merits of higher capital requirements for systemically important domestic banks to bolster resilience under combined shock scenarios.
Monitor funding-profile improvements and maintain high capital quality to support resilience against mortgage and corporate loss scenarios.

Title: Bank Capital Adequacy in Australia
Authors: Niamh Sheridan, B. Jang
Date: January 1, 2012
Series: Working Paper No. 2012/025
Issue: 025
Volume: 2012
Pages: 20
DOI: https://doi.org/10.5089/9781463932527.001
Stock No: WPIEA2012025
ISBN: 9781463932527
ISSN: 1018-5941
Subjects: Banking; Basel II; Capital adequacy requirements; Financial institutions; Financial regulation and supervision; Financial sector policy and analysis; Loans; Residential mortgages; Stress testing
Keywords: Australia; Australia and New Zealand; bank; bank capital adequacy; bank concentration; bank Nonperforming loan; Basel II; Basel III; Canada; capital; Capital adequacy requirements; capital ratio; disclosure statement; Global; home country banking sector assets; LGD rate; Loans; loss given default; loss-given-default rate; mortgage; probability of default; requiring bank; Residential mortgages; risk weight; Stress testing; stress tests; Tier 1; WP

IMF Working Paper "Bank Capital Adequacy in Australia" by Niamh Sheridan and B. Jang, January 1, 2012.