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
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
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