Domestically, liquidity is the key focus, and in particular the final definition of eligible liquid assets.
With APRA's conservative application of the current regulatory framework and with less emphasis placed on trading within the domestic models, it is a widely held belief that Australian Banks will weather the changes to capital adequacy well.
And where Basel III presents a much bigger challenge for the US and European Banks, this may in turn present opportunities for our domestic players.
However, speaking to our clients at the sharp end of capital management, it is clear that there are significant challenges ahead for Australian banks.
Despite headlines indicating banks will comfortably meet the new rules, board targets may well be revised upwards in capital raising. While new target levels of capital need to be agreed both in this transition phase and Basel III end state, the missing link is how far above the new legal minima APRA will set their bank specific PCRs. This is crucial as current practice is to set capital levels above PCR to absorb stress without the risk of regulatory breach.
A complex and lengthy transition process as well as new measures such as the countercyclical buffer present significant challenges to capital management framework. Capital plans over 3-5 years not only need to consider additional capital planning risk, but the risk of a regulatory minima being increased if an "asset bubble" is declared in a given jurisdiction.
Our concern is that the countercyclical buffer measure may be procyclical as impacted banks raise addition capital in a market where their own debt and equity will attract higher capital charges for investors.
Transition arrangements will inevitably create complexity for investor communications - banks will at some point, need to disclose their capital positions against the current rules and of the Basel III end state.
Comparisons will be sought and the current APRA vs FSA comparisons published by Australian Banks will become more complex.
The challenge will be to convince investors that potentially lower sector Return On Equities (ROEs) will be compensated for by increased bank safety.
The challenge will be to effectively communicate the need for reform to mitigate future costs to the public purse. However, reform to create a safer banking system needs to be paid for and while privately many public stakeholders recognise this, public rhetoric suggests the opposite.
This is one of the most significant challenges - a lack of timely and granular information to enable senior management to respond to the GFC was a key issue at the height of the crisis. One of the less publicised principles of the reform agenda is the drive to address this with more granular, timely and relevant reporting and analysis.
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