FORMATO DE PREGUNTAS 1 ¿Conoce a profundidad la definición de autoestima?

The evolution of risk-based capital regulation in Australia has exhibited a strong compliance with international standards implemented by the Basel Committee on Banking Supervision (BCBS). APRA employs a conservative approach to the implementation of international principles, maintaining a number of strict national discretions39. In addition, the Australian regulatory and supervisory framework is strengthened by maintaining principle-based and outcome-oriented supervisory approaches, industry-wide risk assessments and a focus on board responsibility for risk management.

APRA uses risk assessment and supervisory response tools known as the Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS). PAIRS is a structured framework for supervisory judgement built on three principles: the inherent risks facing the ADI resulting from its strategies and risk appetite, the effectiveness of management and controls in controlling and mitigating these risks, and the extent of capital support to meet unexpected losses. SOARS is used to determine how supervisory concerns based on PAIRS risk assessments should be acted upon in order to ensure timely and targeted supervisory intervention if necessary (IMF, 2012a).

APRA implements Prudential Capital Ratios (PCRs) for all ADIs. The PCR is always at least 8% of risk weighted assets, as required under Basel II minimum requirements40. The PAIRS assessment process is a significant input into regulatory decisions to change banks PCR. Historically, PAIRS ratings are updated as much as 2 to 3 times each year as a result of risk

39

For greater detail see Chapter 4 for a summary of regulatory capital developments in the Australian banking system.

40

APRA’s implementation of Basel III has increased minimum requirements and included minimum requirements for common equity tier 1 (CET1) capital, implementation of which is taking effect from January 2013. However for the purposes of this study, the sample includes the Basel I and full Basel II periods only.

visits and preparation for annual reviews and prudential consultations (IMF, 2012a). These have the potential to lead to changes in the PCR, however APRA considers it inappropriate to change PCRs frequently.

In addition to the PAIRs assessment process, PCRs are based on external factors such as the current environment, systemic risk and other issues deemed appropriate for consideration, such as analysis performed by APRA not already captured in ADI’s Internal Capital Adequacy Assessment Process (ICAAP)41. Finally, there is significant leeway for supervisory judgement. APRA’s requirement of ADI-specific PCRs gives rise to considerable variation in capital adequacy ratios across ADIs and over time.

Risk-based capital ratios have varied considerably for ADIs42 since the introduction of Basel I in Australia. Figure 7.1 shows the key trends in the aggregate Australian banking industry capital ratio and the quarterly change in Gross Domestic Product (GDP)43 for the period from March 2004 to December 2012. The dashed line indicates the point when Australian banks began reporting under the Basel II framework in January of 2008.

41

Under the Basel II framework, banks must conduct an ICAAP demonstrating that they have implemented methods and procedures to ensure adequate capital resources, and all material risks must be considered.

42

The term ADI is used instead of banks here because Figure 7.1 shows the aggregate capital ratio consisting of Banks, as well as Credit Unions and Building Societies (CUBS). ADI by definition includes Banks and CUBS.

Figure 7.1 indicates that the Australian banking sector has been adequately capitalised over the sample period, with ADIs holding a considerable buffer over the minimum 8% capital ratio required under the Basel framework. Over the Basel I period, the average aggregate capital ratio was 11.39%, indicating an average aggregate capital buffer of 3.39%. The Basel I period was characterised by an economic expansion in the Australian economy with a quarterly average change in GDP of 0.83%. As displayed in Figure 7.1, the trend in aggregate capital ratios decreased by 0.71% from its high in the March quarter of 2005 to the end of the Basel I period in the December quarter of 2007.

In the March quarter of 2008 the aggregate banking sector capital ratio increased by almost 1 per cent. This was largely due to the implementation of Basel II risk-weightings. Major Banks, which hold 75 per cent of total banking sector assets, implemented the advanced

-1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 8.00% 9.00% 10.00% 11.00% 12.00% 13.00% 14.00% 15.00% 2004 2005 2006 2007 2008 2009 2010 2011 2012 G D P g ro w th R is k w ei gh te d c ap it al ad eq u ac y r at io Quarter Figure 7.1

GDP growth and aggregate risk-based capital adequacy ratio of the Australian banking sector, 2004-2012

Capital Ratio GDP growth

approach to Basel II, resulting in favourable risk-weighted asset calculations44 such as reduced risk-weights for residential mortgage exposures45 and the accreditation of IRB models. Over the Basel II period, aggregate capital ratios continued to rise, averaging 13.19% over the period.

The beginning of the Basel II period was also characterised by the onset of the global financial crisis. Over the Basel II sample period, the quarterly average change in GDP declined from 0.83% to 0.63%, with two quarters of negative growth. There are a few possible explanations for the rise in aggregate capital ratios over the Basel II period. It is likely due to an increased threat of regulatory intervention and market discipline, as well as banks preparing for the implementation of Basel III in Australia. Higher bank capital ratios demonstrate a strong solvency position to the regulator and the market. Thus, weak conditions amid the global financial crisis may have provided an incentive for Australian ADIs to increase their capital ratios.

It is likely ADIs increased capital ratios in anticipation of the Basel III framework. The Basel III framework is due to be implemented in Australia from January 2013 under transitional arrangements. Under the new framework, minimum capital requirements will be increased, with a greater emphasis on higher quality capital46. ADIs have been encouraged to prepare for its implementation, likely contributing to the continued rise in the aggregate capital ratio in the final years of the sample in the lead up to 2013, as shown in Figure 7.1.

44

A more detailed examination of the Australian implementation of Basel II has been included in Chapter 4. 45

Australian’s four major banks hold above 85 per cent of all residential mortgage exposures 46

Higher quality capital is defined by Basel III requirements to constitute the most subordinate claim in liquidation of the bank, a loss absorbing instrument, with a perpetual principle which is never paid outside of liquidation and other elements explained in the Basel III (2011) guidelines.

If these factors have contributed to the rise in the aggregate capital ratio over the Basel II period, there is no regulatory concern. However, if the rise is due in large part to ADIs restricting lending during uncertain conditions surrounding the global downturn, this is a more serious problem in need of regulatory attention. As already mentioned, during a crisis or downturn in the economic cycle, if banks attempt to increase capital ratios by restricting lending, this has the impact of deepening and increasing the length of the downturn. If increased capital requirements and stricter regulation during the downturn cause this bank reaction, then capital regulation is having an undesirable procyclical effect on the economy. In Australia, given the effects of the global financial crisis were mild compared to overseas jurisdictions, a procyclical effect is unlikely. Nevertheless, as a secondary objective, this study provides an investigation.