Preview

Bank Capital Adequacy in Australia

Powerful Essays
Open Document
Open Document
8383 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Bank Capital Adequacy in Australia
WP/12/25

Bank Capital Adequacy in Australia
Byung Kyoon Jang and Niamh Sheridan

© International Monetary Fund

IMF Working Paper Asia and Pacific Department Bank Capital Adequacy in Australia Prepared by Byung Kyoon Jang and Niamh Sheridan1 Authorized for distribution by Ray Brooks January 2012 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The paper finds that, given Australia’s conservative approach in implementing the Basel II framework, Australian banks’ headline capital ratios underestimate their capital strengths. Given their high capital quality and the progress in their funding profiles since the global financial crisis, the 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. However, combining residential mortgage shocks with corporate losses expected at the peak of the global financial crisis would put more pressure on Australian banks’ capital. Therefore, it would be useful to consider the merits of higher capital requirements for systemically important domestic banks. JEL Classification Numbers: G20, G21, G28, F32 Keywords: Australia, Canada, Basel II, Basel III, capital, loss given default, probability of default, stress tests Author’s E-Mail Address: bjang@imf.org, nsheridan@imf.org
The authors would like to thank the Reserve Bank of Australia, the Australian Prudential Regulation Authority, and the Australian Treasury for their valuable comments on earlier drafts of this paper. We benefited greatly from comments and suggestions



References: Australian Bankers’ Association Inc., 2009, Comparison of Regulatory Capital Frameworks: APRA and the UK FSA, June. Australian Prudential Regulation Authority (APRA), 2010a, Insight, Issue 2. ____________, 2010b, Supervisory Oversight and Response System, November. ____________, 2010c, Probability and Impact Rating System, November. ____________, 2011a, Implementing Basel III Capital Reforms in Australia, September. ____________, 2011b, The RBA Committed Liquidity Facility, Media Release, November. ____________, 2011c, Implementing Basel III Liquidity Reforms in Australia, November. Basel Committee on Banking Supervision (BCBS), 2006, International Convergence of Capital Measurement and Capital Standards: A Revised Framework. ____________, 2009, Strengthening the Resilience of the Banking Sector, December. ____________, 2011, Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement, November. Bologna, Pierluigi, 2010, “Australian Banking System Resilience: What Should be Expected Looking Forward? An International Perspective,” IMF Working Paper No. 10/228 (Washington: International Monetary Fund). Davis, Kevin, 2011, The Australian Financial System in the 2000s, paper presented at the Reserve Bank of Australia, Annual Research Conference, August. Debelle, Guy, 2011, Collateral, Funding and Liquidity, Address to Conference on Systemic risk, Basel III, Financial Stability and Regulations, June. European Banking Authority, 2011, 2011 EU-Wide Stress Test: Methodological Note, March. Financil Stability Board, 2010, Intensity and Effectiveness of SIFI Supervision: Recommendations for Enhanced Supervision, November. ____________, 2011, Peer Review of Australia, September. International Monetary Fund, 2010, Australia: Basel II Implementation Assessment, IMF Country Report No. 10/107, May. 19 Kiff, John, 2010, “Canada’s Housing Finance System: Policy Backdrop,” in Canada: Selected Issues Paper, IMF Country Report No. 10/378 (Washington: International Monetary Fund). Laker, J.F., 2010, The Australian Banking System Under Stress?, Australian Business Economists, Sydney, June 9. Reserve Bank of Australia, 2010a, Financial Stability Review, March. ____________, 2010b, Australian Implementation of Global Liquidity Standards, Joint Media Release, December. Takats, E., and P. Tumbarello, 2009, “Australian Bank and Corporate Sector Vulnerabilities—An International Perspective,” IMF Working Paper No. 09/223 (Washington: International Monetary Fund).

You May Also Find These Documents Helpful

  • Better Essays

    Canada remains the only industrialized country in the world that has survived the last two years of financial and economic stress without a single bank failure. One of the key reasons for Canada’s banking system being dominant over its counterpart; the United States is their lending regulations, specifically in the housing and mortgage markets. U.S banking policies also lean towards encouraging borrowers whereas Canadian regulators lean towards making sure lenders are sound. In the Untied States, loan originations by mortgage brokers was at a substantial 70% before the economic crisis vs. Canada’s being at only 35%. During the housing boom of 2006/2007, American banks were blinded by optimism in the currently prosperous housing market and wanted to loan out as much money as possible. Loans were being granted with lower-than-market interest rates to anyone and everyone, regardless of their income and ability to repay the loan. In Canada however loans are always granted with prudence on an individual, case by case basis. Along with this, U.S banks had a mix of recourse and non-recourse laws which differ depending on the state. In other words…

    • 1492 Words
    • 6 Pages
    Better Essays
  • Powerful Essays

    Australian securitization as a source of funding for mortgage originators--who themselves are experiencing a reduction…

    • 17414 Words
    • 70 Pages
    Powerful Essays
  • Powerful Essays

    References: DAVIS, K. 2010. Bank Capital Adequacy: Where to Now? Australian Centre for Financial Studies.…

    • 2585 Words
    • 11 Pages
    Powerful Essays
  • Good Essays

    In our mixed economy, there is a need for regulation and intervention on interest rates and the general level of economic activity. Australia’s current healthy economy has been developed partly through the functions of the Reserve Bank of Australia (RBA). Their functions include; conducting monetary policy, acting as a banker to the government, settling transactions between banks, and ensuring financial stability.…

    • 1347 Words
    • 6 Pages
    Good Essays
  • Good Essays

    Global Banking Crisis

    • 734 Words
    • 3 Pages

    After so much worldwide financial turmoil, learning the right lessons from the global banking crisis is a challenge for the advanced economies and the larger emerging economies whose policies will determine the global financial system over the next several years. The most difficult challenge is not only learning, but applying the lessons learned from the crisis, which proves to be very difficult for all the affected nations and their people whom must live with the consequences. There are various lessons that were learned from the chaotic and disastrous global banking crisis. One of the first lessons that banks discovered is that they must establish an effective governance structure which includes policies dealing with credit risk and specifically with risk tolerance levels. This goes hand in hand with the fact that it is clearly realized from this crisis that credit rating agencies need to reclassify their models used to evaluate cryptic credit risk created in both Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDOs). (Eun & Resnick) Furthermore, the banking crisis has taught borrowers that they must be cautious of placing their faith in its entirety on credit ratings and therefore must question any discrepancies ahead of time. Another insight that was derived from the crisis is the fact that banks must work and build on credit analyses from the bottom up. Banks must ensure that they will be able to resist a severe market hence their liquidity positions, credit reserves and capital bases must be verified. The global banking crisis has also taught us that bankers do not examine credit risk as strictly when they are only acting as mortgage originators and then pass it on to MBS investors instead of holding it themselves. (Eun & Resnick) Bankers seem…

    • 734 Words
    • 3 Pages
    Good Essays
  • Better Essays

    The Global Financial Crisis (GFC) was followed by the deepest recession in the world economy since World War II. The Australian economy performed better during this period than most other advanced economies on nearly all relevant indicators. Although financial and economic conditions were stressed, the financial system worked remarkably well (Tony & Morling, 2011). Diverse factors have been stood in to explain this strong Australian economy performance during this recession. These include the strength of Australian financial system, the monetary and fiscal policy response and the Australian government commission’s well performing. This paper looks at only Australian Securities and Investment Commission (ASIC) performance…

    • 1196 Words
    • 5 Pages
    Better Essays
  • Powerful Essays

    Now, as the United States moves towards a globally interdependent marketplace, the stakes are much higher than they were when Congress established the Federal Reserve in the early 1900’s. A country’s debt can now become the world’s debt, and the role of the U.S. federal banking system is now considerably more under pressure and scrutiny than ever before. As we have been seeing with the current liquidity crisis in the U.S., and how it has affected U.K. and Asian markets, strong, comprehensive policy-making is now crucial to sustaining long-term economic viability.…

    • 5540 Words
    • 23 Pages
    Powerful Essays
  • Best Essays

    HM Treasury, “Reforming UK financial regulation”, [Online] (HM Treasury 2012) http://www.hm-treasury.gov.uk/fin_stability_regreform_structure.htm [Accessed 1 April 2013]…

    • 3402 Words
    • 12 Pages
    Best Essays
  • Satisfactory Essays

    “Australia recently partially deregulated the banking sector, removing many interest rate limits and allowing the entry of 16 new foreign banks, five of which were U.S. banks. Chase Manhattan and Citibank are moving rapidly into the retail banking sector and beginning to provide competition for what was a rather entrenched banking system”. (Government Industries)…

    • 322 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Nbnvb

    • 642 Words
    • 3 Pages

    1. Outline the role of residential mortgage securitization in the US subprime crisis. 2. How did ratings agencies contribute to the financial crisis? 3. Identify the trends in the sector balances in the Australian flow of funds since 1998. 4. What impact did the GFC have on the Australian financial services sector? 5. What is the role of the financial system and why is it important to the economy? 6. Explain what is meant by the term ‘financial intermediation’. 7. What would be the implications for investment in physical assets such as oil refineries or long-distance telephone cable if financial intermediaries were not willing to invest money for long periods? 8. What is the difference between primary and secondary markets? 9. Compare and contrast money and capital markets. 10. Outline the major risks faced by financial institutions. 11. What are some problems with direct financing that make indirect financing more attractive? 12. Explain the concept of financial intermediation. How does the possibility of financial intermediation increase the efficiency of the financial system? 13. Discuss the primary functions that the RBA performs in the Australian financial system and how these relate to achieving its overall responsibilities set out in its charter. 14. How is an increase in the cash rate likely to affect mortgage interest rates, imports, the exchange rate, and inflation? 15. Why is a repo like a secured loan? 16. List and describe three types of hybrid securities and the features they might have. 17. Define the following terms as they relate to secondary markets: depth, breadth, and resiliency. 18. What were the main causes of the financial crisis? 19. What are the major regulatory bodies in the Australian financial system and what are their main roles? 20. Outline the development of central banking in Australia from the CBA, formed in 1912, to the RBA as we know it today.…

    • 642 Words
    • 3 Pages
    Powerful Essays
  • Satisfactory Essays

    Basel Iii

    • 418 Words
    • 2 Pages

    Previous financial crisis have demonstrated that past efforts to prevent systematic crashes are insufficient, and are still working to implement The Basel III framework. The Basel Committee on Banking Supervision tried to concentrate on solving some of the major systematic problems known during the financial crisis, however Basel III might fail to reduce the risks, some major countries could choose to reject the proposals or delay the implementation of this framework.…

    • 418 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Manage

    • 2302 Words
    • 10 Pages

    There are a number of reasons why banks may suddenly increase the costs of borrowing or make borrowing more difficult. In the next report, it should be shown that the main causes of the global credit crunch are sub prime mortgage crises in the US. Analyze the reasons that led to the sub prime mortgage crises and how they precipitated the global credit crunch. In a word, there are three reasons which lead to sub prime mortgage crises. Follow by the report, it should examine and explain the effects these crises, and compare two economies the US and Australia, use data – share prices, interest rates, inflation, unemployment, GDP figures, consumer and business confidence indices, graphs and other like material to support your discussion. Finally, to compare the weekly data on ANZ, CBA, NAB and WBC share prices with the AOI.…

    • 2302 Words
    • 10 Pages
    Powerful Essays
  • Best Essays

    The global financial crisis of 2007 transmitted shock waves worldwide urging international governments to prepare defensive measures to combat this economic turmoil. Hence, on 12th October 2008, the Australian and New Zealand governments introduced analogous schemes to guarantee liabilities issued by a wide range of financial institutions whereby prior to this phenomenon, neither nation had deposit insurance arrangements in place, a distinctive characteristic common in other developed nations.…

    • 3221 Words
    • 13 Pages
    Best Essays
  • Satisfactory Essays

    The noticeable collision of the financial crisis on most Australian households was the large decline in equity prices, “which reduced the wealth of Australian households by nearly 10% by March 2009. However, since the trough in equity markets in March 2009, the local market had recovered half of its decline by the end of November 2009.”…

    • 296 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    References: Aggarwal, R., and K. T. Jacques (2001), “The Impact of FDICIA and Prompt Corrective Action on Bank Capital and Risk: Estimates Using a Simultaneous Equations…

    • 10333 Words
    • 66 Pages
    Powerful Essays