Study on International Comparability of Capital Ratios of Australia's Major Banks

Description
The Australian Bankers’ Association (ABA) has engaged PwC Australia to measure current levels of capital held by the four major Australian banks under the Basel Committee on Banking Supervision (BCBS) Basel Framework1 and in relation to capital held by banks in other jurisdictions.

www.pwc.com.au
Australian
Bankers’
Association:
International
comparability of
capital ratios of
Australia’s major
banks
Australian Bankers'
Association
August 2014
Australian Bankers' Association
PwC 2
Contents
1 Overview 3
1.1 Purpose 3
1.2 Background 3
1.3 Overall results 3
2 Our methodology 5
2.1 What is the best way to measure capital ratios on a consistent basis across banks? 5
2.2 Which banks or groups of banks should be used for comparison purposes? 6
2.3 What is the appropriate balance date to use? 6
2.4 Approaches to measuring bank capital ratios 7
2.5 Total capital ratio 7
2.6 Leverage ratio 7
3 Summary of results 8
3.1 Estimating Australian major bank capital ratios 8
3.2 Australian banks’ Internationally comparable CET1 ratios 9
3.3 Where do Australian major banks sit within an international peer group? 10
3.4 How do Australian major banks compare to advanced banks in other jurisdictions? 12
4 Identification and analysis of differences in calculating CET1 ratios 16
4.1 Identifying differences and areas of judgement 16
4.2 Explanation of the key differences identified in Figure 1 (Impact of differences in the
application of the Basel Framework) 18
Appendix A Australian major banks - detailed analysis of differences between Australian CET1
(APRA) and International comparable CET1 ratio 20
Appendix B Summary of differences and related adjustments 23
Appendix C Areas where APRA’s approach to calculating CET1 differs from RCAP (Australia) and
other adjustments for international comparability 25
Appendix D Areas of difference between Australia and peer group jurisdictions (refers to section
3.4) 28
Appendix E Analysis of international jurisdictions RCAPs 30
Appendix F Extracts of rules pertaining to differences 33
Appendix G Names of Australian banks and jurisdictional peers used in this analysis 52
Appendix H Glossary 53
Appendix I Bibliography 55
Australian Bankers' Association
PwC 3
1 Overview
1.1 Purpose
The Australian Bankers’ Association (ABA) has engaged PwC Australia to measure current levels of capital
held by the four major Australian banks under the Basel Committee on Banking Supervision (BCBS) Basel
Framework
1
and in relation to capital held by banks in other jurisdictions. We have done this using
confidential data supplied by Australian banks to the ABA, together with input from PwC banking specialists
both here in Australia and in overseas markets. This reports sets out our findings.
1.2 Background
Capital is fundamental to all businesses. This is particularly the case in banking, where the core businesses of
borrowing and lending, payments, and trading all depend on capital as a marker of confidence to customers,
counterparties and investors, and as a buffer for losses and unexpected events.
Reflecting the complexity of banking, the calculation and valuation of capital and estimation of capital ratios
in banks is also very complex. This especially reflects the fact that the calculation of many elements of bank
capital ratios requires judgment about risk, and so often a high degree of subjectivity is also involved.
Complexity also arises from the efforts by global regulators over the last three decades to ensure minimum
standards for the amount of capital which banks are required to hold are calculated and applied, to the extent
possible, on a consistent basis across countries. However, ultimately the regulation of banks is a matter of
national sovereignty and so the global standards explicitly allow for national discretion in the way the rules
are applied. In addition there have been many changes to the Basel Framework in recent years and countries
are proceeding at different speeds in the application of these changes. Further, different countries adopt
different accounting standards and this is another source of complexity and difference in relation to the
calculation of capital, albeit that there has been significant convergence in recent years.
Finally, while capital is an important measure of balance sheet strength, it is only one measure of overall risk
for a bank and always needs to be interpreted in a wider context. For instance, systemic risks, levels of credit
concentration or legal uncertainty may vary significantly between banks and across different countries.
1.3 Overall results
It is clear to us that the four Australian major banks are well capitalized relative to both the global standards
and by comparison with banks regulated in many other jurisdictions. This is widely agreed.
Based on the data provided to us by the Australian banks, our best judgment is that, on average, the four
Australian banks are at or above the 75
th
percentile of bank capital relative to the most appropriate
comparator set of global banks.
Some Australian major banks are unambiguously in the top quartile in terms of capital, others are closer to
the 75
th
percentile but are still well above the median. Our overall summary calculation gives a weighted
average Common Equity Tier 1 (CET1) ratio in the range of 11.5 per cent to 12.5 per cent, and as best as we
can judge this is at or above the 75
th
percentile (see page 10). The estimates of risk weighted assets have a
judgemental component and this, in context of Figure 1 (see page 8) explains our conclusion that a range is
appropriate.
Hence, our best judgment is that, on average, the Australian banks are at or above the 75
th
percentile of bank
capital relative to the most appropriate comparator set of global banks.
We have not been asked to consider what levels of capital are appropriate.
1
Basel Framework includes Basel II, Basel 2.5 and Basel III and refers a number of documents. Refer to the BCBS, Regulatory Consistency Assessment
Programme (RCAP): Assessment of Basel III regulations – Canada, BIS, 2014, Annex 3: List of capital standards under the Basel Framework used for
assessment.
Overview
Australian Bankers' Association
PwC 4
PwC’s role
Independence and objectivity
This report is not an audit. In compiling it we have issued instructions and data templates, via the ABA, to
the participating banks, conducted analytical review over the data produced and through the ABA challenged
individual banks to ensure that as far as possible the adjustments have been prepared fairly and reasonably
and on a consistent basis. We have also compared the banks’ results to externally reported information such
as Pillar 3 reports, analyst reports and other relevant national and international information.
The views expressed in the report are those of PwC.
Use of our Report
This report has been prepared for the sole purpose of supporting the ABA in preparing its second round
submission to the Financial System Inquiry 2014 (FSI). This report must not be used for any other purpose
including that it may not be attached to third party submissions to the FSI.
Declaration of Interests
In Australia, PwC operates across all financial services sectors, and works with a high proportion of global
and domestic financial institutions. The nature of our business requires the highest levels of objectivity and
independence, and we have sought to reflect those standards in this document.
Given that this report has been sought by the ABA in the context of the second-round submission to the FSI,
we disclose that we have advised a number of other clients, both formally and informally, on the preparations
for their previous submissions to the FSI. We also note that PwC, both domestically and globally, has
benefitted from the strong growth in the financial services sector in recent decades, including through the
growing global complexity of bank capital and other regulations.
PwC’s submission to the FSI (dated 31 March 2014) can be found at:
http://www.pwc.com.au/industry/financial-services/publications/funding-australias-future.htm. PwC is
also providing a full-time professional secondee to the FSI during 2014, at no cost to the Inquiry or
Government.
We also note that we provide advice to all the Australian banks discussed in this report. We are the external
auditor of the ABA and two of the Australian major banks.
Australian Bankers' Association
PwC 5
2 Our methodology
The objective of this study is to assess the current capital ratios of Australia’s four major banks (“the majors”)
using the Basel Framework so that they can be compared on a like-for-like basis with banks in other
jurisdictions. It is therefore very important to be precise about the basis of these comparisons. This involves
answering three questions:
? What is the best way to measure capital ratios on a consistent basis across banks?
? Which banks or groups of banks should be used for comparison purposes?
? What is the appropriate balance date to use?
2.1 What is the best way to measure capital ratios on a
consistent basis across banks?
At the ABA’s request, our study is concerned with the Basel III CET1, on a fully implemented basis (i.e.
applying Basel III capital requirements as if they applied in full already). We have considered three ways to
measure CET1 for these purposes:
1 Measurement using applicable national rules – e.g. CET1 (APRA), CET1 (UK) etc.
As noted above, national regulators have discretion in relation to the application of the Basel Framework
in their jurisdiction and so this measure reflects full implementation of the Basel Framework in that
jurisdiction.
This measure is appropriate for answering a question like “how would the Australian major banks be
measured under the Canadian rules and how do they compare to the Canadian banks on that basis?” In
this instance we would refer to the calculation as CET1 (Canada).
2 Measurement using Basel Framework rules - CET1 (Basel Framework)
2
This refers to the application of the rules as set out exactly in the Basel Framework (before any national
discretion is applied). This methodology seeks to quantify all differences which have been highlighted in
the BCBS Regulatory Consistency Assessment Programme report (RCAP) for a particular jurisdiction to
produce a comparable set of ratios. For Australia, the RCAP report was published in March 2014
3
. This
ratio is in principle similar to the “BCBS internationally harmonised” ratios which are self-reported by
many banks, albeit with a greater range of adjustments (as identified by the March 2014 RCAP).
3 Measurement using Basel Framework rules and further adjusting for national regulatory treatments
which would impact on how those rules are implemented in that jurisdiction by comparison to
international norms - Internationally comparable CET1. This refers to a methodology which starts
with CET1 (Basel Framework) and further adjusts for other recognised differences (such as risk
modelling parameters and national discretions) which are applied at a local level by comparison to
average international settings. This is more judgemental and harder to quantify precisely, however, the
BCBS has published information which allows some level of “normalisation”.
Reflecting this more complete treatment, we believe that the Internationally comparable CET1
measure is generally a preferable measure to the CET1 (Basel Framework) measure. We use this
measure for answering a question like “where do the Australian banks sit in comparison to banks drawn
from many different countries?”
Refer to section 4 and appendix B for further discussion about individual adjustments and the degree of
judgement and subjectivity involved in calculating them.
2
BCBS, Basel III: A global regulatory framework for more resilient banks and banking systems, BIS, December 2010 (rev. June 2011)
3
BCBS, Regulatory Consistency Assessment Program (RCAP): Assessment of Basel III regulations - Australia, BIS, March 2014
Our methodology
Australian Bankers' Association
PwC 6
2.2 Which banks or groups of banks should be used for
comparison purposes?
One way to address this would be to consider the question: “how would the Australian banks be measured
under the Canadian rules and how do they compare to the Canadian banks on that basis?”. To answer this,
we have chosen six jurisdictions - Canada, Europe (using Germany as a proxy), United Kingdom,
Switzerland, Singapore and Japan. We have chosen these six jurisdictions because they represent a relatively
wide spread of countries across the globe broadly relevant to Australia, and which are well advanced in the
implementation of Basel III, including having had an RCAP review undertaken which gives an independent
assessment of the extent of national discretion. We have not chosen the US because the US banking system is
generally less advanced in applying the full Basel Framework. Further jurisdictions could be examined if the
ABA believes that would be useful.
In order to answer the different question: “where do the Australian banks sit in comparison to banks drawn
from many different countries?”, we have chosen the published Basel III ratios for Global Systemically
Important Banks (G-SIBs)
4
and Domestic Systemically Important Banks (D-SIBs)
5
from the six selected
jurisdictions noted above.
The FSI Interim Report
6
uses BCBS data
7
covering 102 banks, from 27 countries, including small banks
(down to Euro 3bn of capital) as well as large banks, and with a wide range of capital ratios (from 2.5 per cent
to 20.2 per cent). Without access to the underlying data for the individual banks in the survey, we (PwC)
need to be cautious in making judgements. However, from our understanding of global banking there is a
risk that the wide range of capital ratios is driven by smaller banks in less relevant jurisdictions. We also note
that the data is now over one year old. We would certainly welcome the opportunity to have access to the full
population of that BCBS data.
It is also important to note that the data provided by the Australian major banks included in the BCBS study
is not on a strictly comparable basis because it only adjusts for the capital differences and does not adjust for
the majority of the risk weighted asset differences noted in this report.
While our study uses data from a smaller group of banks by comparison to the FSI Interim Report, we are
satisfied that that our sample represents an appropriate group of peer banks against which to compare the
Australian major banks.
Our study has a narrower range of observed Internationally comparable CET1 ratios, and therefore does not
include banks with extremely high or extremely low capital ratios, observed in the BCBS larger population.
Nevertheless the median CET1 ratio in the BCBS study is 10 per cent, which is very similar to the median in
our chosen group of 10.4 per cent. The 75
th
percentile of the BCBS group is 11.7 percent by comparison to 11.4
per cent for this study.
Refer to appendix G for a detailed listing of the Australian banks and jurisdictional peers used in this
analysis.
2.3 What is the appropriate balance date to use?
We have chosen to carry out this study using the most recently available data of capital information. We have
collected information from the Australian banks as at their most recent half year or year-end balance date.
We have also collected data from international peer banks using the most recently available information so
that the comparisons are on a like-for-like basis.
4
BCBS, Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement, BIS, July 2013
5
BCBS, A framework for dealing with domestic systemically important banks, BIS, October 2012
6
FSI, The Financial System Inquiry 2014 (Murray): Interim Report, Australian Government, chapter Post –GFC Regulatory Response, Stability,
section.3-36 to 3-37, July 2014
7
BCBS, Basel III Monitoring Report, Statistical Annex: Table A3, BIS, March 2014
Our methodology
Australian Bankers' Association
PwC 7
2.4 Approaches to measuring bank capital ratios
The Basel Framework adopts a standard approach to calculating risk weighted assets based on
internationally relevant criteria. However it also acknowledges that larger, more sophisticated banks, with
better quality risk data and modelling expertise are able to produce their own risk weighting factors which
better reflect how they manage risks. Under the Basel Framework such banks can apply to their national
regulator to use their own models for producing risk weighted assets. Banks which have been accredited to
use their own models for calculating risk weighted assets are referred to as advanced banks. There are in turn
two Internal Ratings-based (IRB) approaches to credit risk; the Advanced (AIRB) and Foundation (FIRB).
We adopt this terminology in this report for banks which have received accreditation from Australian
Prudential Regulation Authority (APRA) to use their own risk models. The four Australian major banks apply
the AIRB approach for credit risk to the vast majority of their portfolios.
In implementing the Basel Framework, national regulators are expected to build conservatism into their
respective financial systems by including buffers in the risk assessments under Pillar 1 and to address bank
specific risks by requiring banks to operate above the BCBS minimum required capital ratios under Pillar 2.
The approach taken will impact the comparability of reported capital ratios both between banks with in a
country and between countries.
2.5 Total capital ratio
As instructed by the ABA, this study has focused on CET1. Wider measures of capital (Tier 1 and Total Capital
ratios) are also required to be monitored and managed under the Basel Framework.
Comparative assessments of these wider ratios for Australian banks on a fully implemented Basel III basis
are complicated by the fact that different jurisdictions are at different stages in confirming the rules which
would apply to different bank capital instruments in the event of a bank approaching insolvency. In
Australia, for instance, banks have only recently started the process of replacing their Basel II instruments
with new instruments compliant with the Basel III rules in this regard. The fact that both confirmation of
the rules and consequent implementations are at such different stages in different jurisdictions makes
comparisons other than for CET1 ratios much more challenging and beyond the scope of this report.
2.6 Leverage ratio
The Leverage ratio is also required to be calculated and managed under Basel III from 2018 onwards. This is
an alternative way of representing capital levels and may show a different picture by comparison to CET1.
APRA has not yet issued their detailed rules governing how the Leverage ratio should be calculated and it has
not therefore been practical to compare Leverage ratios for Australian banks by comparison to their global
peers in this study.
Australian Bankers' Association
PwC 8
3 Summary of results
3.1 Estimating Australian major bank capital ratios
Figure 1 below sets out our analysis of the weighted average CET1 ratio for the four Australian major banks
expressed on a CET1 (APRA), CET1 (Basel Framework) and an Internationally comparable CET1
basis, based on the latest available information. The table also shows a similar analysis undertaken by APRA,
based on earlier information, which was included in APRA’s submission to the FSI
8
.
Figure 1: Impact of differences in the application of the Basel Framework on CET1
(APRA) ratios
PwC Study, August
2014
APRA submission to
the FSI, March 2014
(Note
D)
Impact
on CET1
ratio
(bps)
Weighted
average
ratio (%)
Impact
on CET1
ratio
(bps)
Weighted
average
ratio (%)
CET1 (APRA) ratio (Note A)
8.76 8.28
Adjustments to align with Basel III
Add back capital deductions not required
under Basel III
1 109 113
Reduce risk weightings for credit risk
(residential mortgages and specialised lending
exposures)
2 96 61
Reverse capital charge for interest rate risk
in the banking book
3 30 28
Adjustment for less conservative APRA
standards
4 (8) (22)
Standardised risk weights
5 12
Total adjustment
240 180
Actual CET1 uplift (Note B)
2.79 1.89
CET1 (Basel Framework) ratio (Note C)
11.55 10.17
Additional areas where credit risk estimates
are more conservative in Australia by
comparison to norms adopted in other
jurisdictions
6 114 n/a
Internationally comparable CET1 ratio
12.69
Source: Individual bank data, PwC analysis, 2014. Roundings have been applied above and throughout this report.
Note A: CET1 ratio (APRA) per the PwC study is based on the most recent half-year or year-end balance date, whereas
APRA's figures are for earlier dates.
Note B: The items are not additive as the impact on the CET1 ratio of each item is calculated independently of the
impact of the other items.
Note C: Includes RCAP differences.
Note D: Refer to section 4.2 for explanation on adjustments.
Adjustments to risk weighted assets (items 2 and 6) by their nature are more subjective, and hence the range
of 11.5 per cent to 12.5 per cent expressed in our overall conclusion.
8
APRA, Financial System Inquiry: Submission, APRA, March 2014
Summary of results
Australian Bankers' Association
PwC 9
The other main points to note are:
? our preferred measure of capital Internationally comparable CET1, shows the four major Australian banks
have a weighted average ratio of 12.69 per cent;
? a number of the uplift factors from CET1 (APRA) to CET1 (Basel Framework) in the PwC and APRA
calculations are broadly comparable, the main exception being allowance for those factors where APRA
standards are less conservative. We expect these differences are likely to be explained by this study using
more recent data (and possibly a wider group of banks being used by APRA);
? our calculation of the Internationally comparable CET1 ratio shows a further 114bp uplift for the four
major banks to take the weighted average ratio to 12.69 per cent.
As usual, we need to avoid a sense of false precision and interpret these numbers in the context of the
subjectivity and judgements involved. We believe that, in total, the analysis should best be interpreted as a
weighted average CET1 ratio in the range of 11.5 per cent to 12.5 per cent for Australian major banks.
3.2 Australian banks’ Internationally comparable
CET1 ratios
Figure 2 summarises the data from Figure 1 above, for the four Australian banks in our study.
Whilst there is an uplift in the capital ratio for all the banks when measured on an Internationally
comparable basis, the quantum of the uplift varies from bank to bank as it is dependent on the individual
banks’ own particular circumstances including asset mix and risk appetite, as well as modelling assumptions
and data.
Figure 2: Major banks’ Internationally comparable CET1 ratios
Source: Individual bank data, PwC analysis, 2014.
Note: See definitions in section 2.1.
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
ANZ CBA NAB WBC
CET1 (APRA) ratio CET1 (Basel Framework) ratio Internationally comparable CET1 ratio
12.19%
13.98%
11.67%
13.07%
Summary of results
Australian Bankers' Association
PwC 10
3.3 Where do Australian major banks sit within an
international peer group?
The most objective way to answer this question available to PwC is to compare our Internationally
comparable CET1 ratio for the four Australian major banks with the closest equivalent data for a peer group
of overseas banks, taking into account known differences in those offshore banks.
Figure 3: International peer group Internationally comparable CET1 ratios
(Refer to the following page for notes)
Rank Bank (Note 3)
Total assets
(AUD bn) Date
Internationally
comparable
CET1 (Note 2)
1 Nordea (Note 4) 983 30.06.2014 15.82%
2 Commonwealth Bank of Australia 791 30.06.2014 13.98%
3 UBS AG 1,175 30.06.2014 13.50%
4 Rabobank Group 1,040 31.12.2013 13.50%
5 Danske Bank 638 30.06.2014 13.20%
6 Westpac Banking Corporation 729 31.03.2014 13.07%
7 Intesa Sanpaolo (Note 4) 909 30.06.2014 12.99%
8 State Street Corporation 299 30.06.2014 12.80%
9 DBS Group Holdings Ltd. 355 30.06.2014 12.20%
10 Australia and New Zealand Banking Group 738 31.03.2014 12.19%
11 National Australia Bank Ltd. 846 31.03.2014 11.67%
12 Deutsche Bank AG(Note 4) 2,418 30.06.2014 11.64%
13 HSBC Holdings Plc. (Note 4) 2,920 30.06.2014 11.43%
14 Oversea-Chinese Banking Corporation Limited 296 30.06.2014 11.30%
15 Natixis (owned 70% by Groupe BPCE) 795 30.06.2014 11.20%
16 Groupe BPCE 1,631 30.06.2014 11.10%
17 Lloyds Banking Group PLC 1,531 30.06.2014 11.10%
18 China Construction Bank (Note 1) 2,800 31.03.2014 11.10%
19 Industrial and Commercial Bank of China Limited
(Note 1)
3,424 31.03.2014 10.90%
20 Standard Chartered Bank (Note 4) 732 30.06.2014 10.87%
21 Citigroup 2,025 30.06.2014 10.60%
22 Societe Generale (Note 4) 1,920 30.06.2014 10.51%
23 ING Group 1,409 30.06.2014 10.50%
24 Morgan Stanley 876 31.12.2013 10.50%
25 Mitsubishi UFG 2,657 31.03.2014 10.40%
26 UniCredit (Note 4) 1,217 30.06.2014 10.40%
27 BNP Paribas (Note 4) 2,768 30.06.2014 10.30%
28 Sumitomo Mitsui Financial Group 1,706 31.03.2014 10.30%
29 Royal Bank of Scotland Group PLC 1,834 30.06.2014 10.10%
30 Wells Fargo 1,695 30.06.2014 10.10%
31 Barclays PLC(Note 4) 2,385 30.06.2014 10.04%
32 Bank of Communications (Note 1) 1,037 31.03.2014 10.04%
33 Banco Bilbao Vizcaya Argentaria 896 30.06.2014 10.00%
34 Bank of New York Mellon 425 30.06.2014 10.00%
35 Canadian Imperial Bank of Commerce 390 30.04.2014 10.00%
36 Credit Agricole S.A 2,204 30.06.2014 9.90%
37 Bank of America 2,302 30.06.2014 9.90%
38 JP Morgan Chase 2,672 30.06.2014 9.80%
39 Goldman Sachs 912 31.12.2013 9.80%
Summary of results
Australian Bankers' Association
PwC 11
Rank Bank (Note 3)
Total assets
(AUD bn) Date
Internationally
comparable
CET1 (Note 2)
40 Bank of Nova Scotia 778 30.04.2014 9.80%
41 Royal Bank of Canada 881 30.04.2014 9.70%
42 Bank of Montreal 572 30.04.2014 9.70%
43 Bank of China (Note 1) 2,621 31.03.2014 9.58%
44 Credit Suisse Group 1,066 30.06.2014 9.50%
45 Agricultural Bank of China (Note 1) 2,658 31.03.2014 9.48%
46 Commerzbank AG 846 30.06.2014 9.40%
47 Toronto Dominion Bank 881 30.04.2014 9.20%
48 China Merchants Bank (Note 1) 764 31.03.2014 9.09%
49 Banco do Brasil 674 30.06.2014 8.77%
50 National Bank of Canada 191 30.06.2014 8.70%
51 Mizuho FG(Note 1) 1,842 31.03.2014 8.60%
52 China Minsheng Banking Corporation (Note 1) 602 31.03.2014 8.50%
Source: Individual bank data, PwC analysis 2014.
Note 1: CET1 for Chinese banks - Calculated in accordance with the Administrative Measures for the Capital of
Commercial Banks (Provisional) which is used as the comparable proxy for comparison to the CET1 (fully-
loaded).
Note 2: Recalculated for Australian major banks to adjust for RCAP and other differences.
Note 3: The list of banks comprises of global banks with total assets of over A$ 600bn, G-SIBs published by the
Financial Stability Board in November 2011 and November 2013, D-SIBs which have been announced by local
regulators (Canada, Singapore and Switzerland) and which have disclosed fully implemented Basel III capital
adequacy ratios or sufficient public disclosure for a comparable estimate. Adequate public disclosure was
unavailable for Banco Santander, Banque Populaire CdE, United Overseas Bank, Raiffeisen, Zurich Cantonal
Bank, Banque Cantonale Vaudoise, Industrial Bank, Shanghai Pudong Development Bank, China CITIC Bank
as at the date of this report.
Note 4: Foreseeable dividend deducted in reported fully-loaded CET1 has been added back to obtain the Internationally
comparable CET1 ratio. See appendix D for further details.
Note 5: There are other potentially applicable adjustments for some international banks which are not included above
due to insufficient available information.
In interpreting this chart, please note that we have been able to drill into the data for the Australian banks to
a much greater degree than we have for the offshore comparator group. Nonetheless with proper allowance
for these uncertainties, we believe that the data as set above sustains the conclusion that, on average, the
Australian banks are at or above the 75th percentile of bank capital relative to the most appropriate
comparator set of global banks. This conclusion would be sustained even if one takes the lower end of
our 11.5 per cent - 12.5 per cent estimated range.
Summary of results
Australian Bankers' Association
PwC 12
3.4 Howdo Australian major banks compare to
advanced banks in other jurisdictions?
In this section we apply applicable national rules to the Australian banks for the six jurisdictions identified in
section 2.2. The principle differences between Australia and the jurisdictions below are summarised in
appendix D.
We have noted for information purposes the expected levels of CET1 which may be required following
implementation of domestic systemically important banks (D-SIBs) frameworks. The expected level of CET1
post implementation has been added to each jurisdiction graph. It should be noted that in some cases the
CET1 ratios are based on recommendations or preliminary guidance. In Australia, APRA’s D-SIB framework
includes a 1 per cent buffer (to make an 8 per cent expected CET1 ratio, inclusive of the capital conservation
buffer of 2.5 per cent).
3.4.1 Canada
Reflecting the analysis in Appendix D and Appendix E, we have not identified any adjustments that need to
be made to the Internationally comparable CET1 ratio for the Australian banks in calculating their CET1
(Canada) ratio.
However, when comparing to banks in Canada, account needs to be taken of structural differences in the way
Lenders Mortgage Insurance (LMI) works. In Canada, mortgages may be insured with the Canada Mortgage
and Housing Association, which is fully guaranteed by the Canadian government and are afforded the zero
risk weight of the sovereign. The Canadian regulator also allows zero risk weights where a mortgage is
comprehensively insured by a private sector mortgage insurer that has a backstop guarantee provided by the
Canadian government. In Australia, LMI insurance is not taken into account by IRB banks when modelling
risk weights for residential mortgages that are insured. Given that a substantial number of Canadian
mortgages are LMI insured, it follows that the capital ratios for Canadian banks are not directly comparable
to those of the Australian banks. This is a structural difference which is not appropriate to adjust for in this
comparative study.
Figure 4: Australian and Canadian banks on a CET1 (Canada) basis
Source: Individual bank data, PwC analysis, 2014.
Refer to appendix G for abbreviated terms.
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
CBA WBC ANZ NAB CIBC BNS BMO RBC TD
C
E
T
1
r
a
t
i
o
Australia Canada Min (inc buffers)
Summary of results
Australian Bankers' Association
PwC 13
3.4.2 Germany
Reflecting the analysis in Appendix D and Appendix E, we noted the following adjustment that needs to be
made to the Internationally comparable CET1 ratio for the Australian banks in calculating their CET1
(Germany) ratio. Foreseeable dividends are deducted from capital when calculating their CET1 ratio, this
reduces the capital ratio. In calculating the CET1 (Germany) ratio for Australian banks, a similar adjustment
has been applied to reflect the dividend declared or expected out of current period earnings.
Figure 5: Australian and German banks on a CET1 (Germany) basis
Source: Individual bank data, PwC analysis, 2014.
Refer to appendix G for abbreviated terms.
3.4.3 United Kingdom (UK)
Reflecting the analysis in Appendix D and Appendix E, we noted the following adjustments that need to be
made to the Internationally comparable CET1 ratio for the Australian banks in calculating their CET1 (UK)
ratio:
? Deduct foreseeable dividends from the capital base (reduces capital ratio);
? Apply a 45 per cent LGD floor to sovereign exposures (reduces capital ratio); and
? Apply the supervisory slotting approach (with BCBS defined risk weights) to a portion of the specialised
lending portfolio (reduces capital ratio).
Figure 6: Australian and UK banks on a CET1 (UK) basis
Source: Individual bank data, PwC analysis, 2014.
Refer to appendix G for abbreviated terms.
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
CBA WBC ANZ DBK NAB CBK
C
E
T
1
r
a
t
i
o
Australia Germany Min (inc buffers)
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
CBA HSBC ANZ WBC LLOY SCB NAB RBS BARC
C
E
T
1
r
a
t
i
o
Australia UK Min (inc buffers)
Summary of results
Australian Bankers' Association
PwC 14
3.4.4 Singapore
Reflecting the analysis in Appendix D and Appendix E, we noted the following adjustment that needs to be
made to the Internationally comparable CET1 ratio for the Australian banks in calculating their CET1
(Singapore) ratio.
The supervisory slotting approach for Specialised Lending (with BCBS defined risk weights) is applied to a
portion of the specialised lending portfolio, this reduces the capital ratio. In calculating the CET1 (Singapore)
ratio for Australian banks, a similar adjustment has been applied to the specialised lending portfolio.
As noted in section 4.1.2, there are structural differences between Australia and Singapore in relation to
mortgages.
Figure 7: Australian and Singaporean banks on a CET1 (Singapore) basis
Source: Individual bank data, PwC analysis, 2014.
Refer to appendix G for abbreviated terms.
3.4.5 Switzerland
Reflecting the analysis in Appendix D and Appendix E, we have not identified any adjustments that need to
be made to the Internationally comparable CET1 ratio for the Australian banks in calculating their CET1
(Swiss) ratio.
Figure 8: Australian and Swiss banks on a CET1 (Swiss) basis
Source: Individual bank data, PwC analysis, 2014.
Refer to appendix G for abbreviated terms.
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
CBA DBS WBC ANZ NAB OCBC
C
E
T
1
r
a
t
i
o
Australia Singapore Min (inc buffers)
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
CBA UBS WBC ANZ NAB Credit Suisse
C
E
T
1
r
a
t
i
o
Australia Switzlerland Min (inc buffers)
Summary of results
Australian Bankers' Association
PwC 15
3.4.6 Japan
Reflecting the analysis in Appendix D and Appendix E, we have not identified any adjustments that need to
be made to the Internationally comparable CET1 ratio for the Australian banks in calculating their CET1
(Japanese) ratio.
According to the BCBS’s progress report on Basel III implementation (April 2014), a D-SIB approach is still
being developed.
Figure 9: Australian and Japanese banks on a CET1 (Japanese) basis
Source: Individual bank data, PwC analysis, 2014.
Refer to appendix G for abbreviated terms.
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
CBA WBC ANZ NAB MUFG SMTH
C
E
T
1
r
a
t
i
o
Australia Japan
Australian Bankers' Association
PwC 16
4 Identification and analysis of
differences in calculating
CET1 ratios
4.1 Identifying differences and areas of judgement
4.1.1 Overall approach to identifying differences in CET1 ratio calculations
We identified differences in approach to implementing the Basel Framework from a variety of sources:
a The BCBS (March 2014) Regulatory Consistency Assessment Programme (RCAP), Assessment of
Basel III regulations – Australia, which identified:
i. twenty-seven areas where APRA was considered to be more conservative than the Basel Framework
(not all of these were considered to be material differences), and
ii. three areas where APRA was considered to be (potentially) materially less conservative than the
Basel Framework.
b RCAP assessment reports issued by the BCBS for other countries; Canada, Brazil, China, Switzerland,
Singapore, European Union, Japan and the United States (all conducted between October 2012 and
June 2014).
c BCBS’ thematic study
9
which analysed risk weighted assets for credit risk in the banking book (this is
discussed in section 4.1.2. below).
d We also researched literature, considered other methods for calculating capital adopted by rating
agencies and consulted the PwC international network. The PwC international network also assisted us
in gaining an understanding of the nature of differences identified in their jurisdictions, the overall
approach adopted by their respective regulators in implementing the Basel Framework and relevant
structural aspects of their banking industry.
The full list of identified differences was categorised as follows:
? Category A – RCAP (Australia) findings where APRA is considered to be more conservative than the
Basel Framework. Some of these adjustments are not applicable to the CET1 ratio for advanced banks and
others were considered to be immaterial. For more information refer to appendices B and C.
? Category B – Potentially material RCAP (Australia) findings where APRA is considered to be less
conservative than the Basel Framework. For more information refer to appendices B and C.
? Category C – Other adjustments identified from other RCAP reports, reviewing other banks reported
information and reaching out to the PwC international network. These are discussed in more detail in
section 4.1.2 below.
Appendices B to F contain a complete list of all differences we considered, detailed descriptions of individual
differences and our assessment of the applicability of each difference to calculating CET1 ratios.
9
BCBS RCAP Analysis of credit risk weighted assets in the banking book, July 2013
Identification and analysis of differences in calculating CET1 ratios
Australian Bankers' Association
PwC 17
4.1.2 Credit risk weighted assets - Australia’s model outcomes compared to
international norms
Credit risk is the major contributor to risk weighted assets for Australian banks and can be a cause of
measureable inconsistencies between the International comparable CET1 ratios for Australian banks and
global peers.
AIRB banks use their own data and models to generate the factors used to risk weight their assets. Individual
bank models are subject to approval by their national regulator. National regulators can set limits when
applying risk factors and require specific assumptions to be built into the models. Both individual bank
modelling assumptions and the way national regulators implement the Basel Framework introduce
differences which need to be considered when making comparisons.
Residential Mortgage Loss Given Default (LGD) floors
When introducing Basel II, the BCBS
10
set an LGD floor of 10 per cent on residential mortgages due to a lack
of long-term historical data relating losses arising in periods of financial stress. This floor prevents banks
from setting the LGD assumption too low. APRA has used its national discretion to impose a higher, 20 per
cent, LGD floor on residential mortgages in Australia. This 20 per cent LGD floor assumption gives rise to
Australian banks holding more capital against their mortgage book than banks in other jurisdictions. This is
further exacerbated by the tendency for Australian banks to hold a higher proportion of residential mortgage
assets than in other jurisdictions.
In order to allow for this impact in our analysis, we have required the Australian AIRB banks to apply a 15
per cent flat LGD to their residential mortgage books. For most banks that have modelled their portfolios
using a 10 per cent LGD floor, the results show LGD’s higher than 10 per cent, however these are not
accredited models and so not judged to be a prudent basis for our estimate. Taking into consideration
structural differences such as the higher loan-to-value ratios (LVRs) between Australia and other countries
such as Singapore (where LVRs cannot exceed 80 per cent for first properties)
11
and Canada (where there is a
government based LMI scheme), in our judgement we consider a 15 per cent flat LGD assumption to be a
reasonable proxy. A 1 per cent change in the mortgage LGD assumption represents 7 bps change in the
average CET1 ratio.
Unsecured corporate lending (LGD)
In a number of jurisdictions banks have found it difficult to achieve full AIRB accreditation for their
unsecured corporate lending portfolios due in part to a lack of reliable loss data over a sufficient time period.
In keeping with the Basel Framework, banks in this situation use the FIRB approach for determining risk
weighted assets for the portfolio. The FIRB approach uses a 45 per cent LGD modelling assumption for
unsecured corporate exposures.
The BCBS (July 2013) RCAP report, Analysis of risk-weighted assets for credit risk in the banking book
12
,
confirmed that variation in LGDs for corporate exposures in the hypothetical portfolio is a driver of
inconsistency in the comparability of risk weightings.
As unsecured corporate loans are a significant portfolio relative to overall balance sheet size for Australian
banks, differences in this modelling assumption would be expected to impact the overall international
comparability of the capital ratio.
To negate this impact in our analysis we have required the Australian banks to model their risk weighted
assets for unsecured corporate exposures adopting the FIRB approach of using a 45 per cent LGD. In our
judgement, given that approximately half of the international peer group currently use the FIRB approach,
we consider this to be a reasonable measure to bring the Australian banks more in line with banks in other
jurisdictions.
10
BCBS, Basel II: International Convergence of Capital Measurement and Capital Standards, BIS, June 2006
11
More specific guidance is outlined in Monetary Authority of Singapore (MAS), MAS Notice 632, Residential Property Loans, MAS, para 30(t), February
2014
12
BCBS, Regulatory Consistency Assessment Programme (RCAP) Analysis of risk-weighted assets for credit risk in the banking book, BIS, July 2013
Identification and analysis of differences in calculating CET1 ratios
Australian Bankers' Association
PwC 18
Undrawn corporate lending (EAD)
Another area of inconsistency in international comparability of risk weighted assets identified by the BCBS
RCAP thematic report was the assessment of exposure at default (EAD) for undrawn commitments (referred
to as credit conversion factors, or CCF in the Basel Framework). The BCBS report identified that ‘for AIRB
banks, the average conversion factor applied to undrawn commitments is roughly 50 per cent; this can be
contrasted with the 75 per cent CCF for such commitments under the FIRB approach’
13
. We understand that
Australian AIRB banks use higher conversion factors for the EAD relating to undrawn commitments,
typically 100 per cent.
In order to negate the impact of higher EADs for undrawn commitments, in our judgement we consider it
reasonable to apply the FIRB conversion factor of 75 per cent to the undrawn commitments in the AIRB
banks’ corporate loan books.
4.2 Explanation of the key differences identified in
Figure 1 (Impact of differences in the application of the
Basel Framework)
A complete list of all differences identified and considered in this study can be found in appendices C and D.
The following table further analyses the major adjustments reflected in Figure 1: Impact of differences in the
application of the Basel Framework on CET1 (APRA) ratios, section 3.
Description
Weighted
average
impact on
CET1 (APRA)
(bps)
Ref App.B Major banks
Differences between APRA prudential standards and the Basel Framework
1 Capital deductions
APRA requires 100 per cent deductions from capital for deferred tax assets,
intangibles relating to capitalised expenses and all investments (e.g. financial
institutions, funds management and insurance subsidiaries). The Basel Framework
allows a concessional threshold before these deductions apply. Assets below the
threshold can be risk weighted.
A3, A4, A5
109
Credit risk weightings
2 Mortgage Loss Given Default (LGD) 20 per cent floor
The Basel Framework imposes a 10 per cent floor in downturn LGD models used for
residential mortgages, whereas APRA imposes a 20 per cent floor. In our judgement,
a 15 per cent flat LGD is a reasonable proxy. Refer to section 4.1.2 above.
A1
40
2 Specialised Lending
APRA rules for ‘specialised lending’ (corporate lending to project finance, certain real
estate exposures, commodity finance etc) are more conservative than those contained
in the Basel Framework and/or which are applied by most other prominent
jurisdictions included in this study
A2
50
3 Interest rate risk in the banking book (IRRBB)
APRA’s rules require the inclusion of IRRBB within the Pillar 1 risk weighted assets
framework for banks using AIRB approaches; IRRBB is not required to be assessed
under Pillar 1 in the Basel Framework. It is highlighted as a risk that may be taken
into account in assessing Pillar 2 capital ratios.
A11
30
13
BCBS, Regulatory Consistency Assessment Programme (RCAP) Analysis of risk-weighted assets for credit risk in the banking book, BIS, p.46, July
2013
Identification and analysis of differences in calculating CET1 ratios
Australian Bankers' Association
PwC 19
Description
Weighted
average
impact on
CET1 (APRA)
(bps)
4 Scaling factor related to specialised lending exposures
APRA does not apply the 1.06 scaling factor for risk weighted assets calculated under
the IRB approach, to specialised lending assets classes, as prescribed in the Basel
Framework.
B2
(7)
4 Non owner occupied home loans
The RCAP rated APRA’s approach to residential mortgage exposures eligible for retail
treatment under the IRB approach as a potentially material deviation, as APRA does
not include an owner-occupancy constraint. A literal interpretation of the relevant
paragraph in the Basel Framework can exclude non-owner occupied exposures. APRA
commented in its response that its view is that the paragraph is ambiguous and a
large number of other Basel Committee member jurisdictions have implemented the
relevant paragraph in the same manner as APRA. Further commentary of this issue is
contained on pages 14 to 15 of the BCBS RCAP (Singapore), March 2013.
The banks in the study group were requested to quantify this potential deviation. In
some cases, banks calculated an increase in risk weighted assets and in another case a
reduction. None of the adjustments was more than 10 basis points and because of the
difficulties in agreeing a consistent methodology for the adjustment, no adjustment
was included for this item in the final analysis. Given APRA’s comments about other
Basel Committee member jurisdictions adopting a similar approach, this appears to
be reasonable in the context of this study.
B3
n/a
5 Standardised risk weights
Some advanced banks have retail portfolios that are assessed using the .Standardised
approach. APRA applies more conservative risk weights than the Basel Framework for
some standardised retail exposures.
A6
11
Other areas where credit risk estimates are more conservative in Australia by comparison to
norms adopted in other countries
6 Unsecured corporate lending LGD
In our judgement, we consider it reasonable to apply the assumption of 45 per cent
LGD, given that approximately half of the international peer group currently use the
FIRB approach, which applies this assumption. This brings Australian banks more in
line with banks in other jurisdictions. Refer to section 4.1.2 above.
C2
79
6 Undrawn corporate lending EAD
In our judgement we consider it reasonable to apply the FIRB conversion factor of 75
per cent to the undrawn commitments in the AIRB banks corporate loan books. Refer
to section 4.1.2 above.
C1
31
This concludes the main
body of our report
Australian Bankers' Association
PwC 20
Appendix A Australian major banks - detailed analysis of
differences between Australian CET1 (APRA) and International
comparable CET1 ratio
Table A1 – Summary of CET1 adjustments (in per cent)
*Ref. ANZ CBA NAB WBC Weighted
Average 31/03/2014 30/06/2014 31/03/2014 31/03/2014
CET1 (APRA) ratio 8.33% 9.30% 8.64% 8.82% 8.76%
Category A adjustments: APRA more conservative
Mortgage LGD (20% floor) A1 0.32% 0.55% 0.28% 0.47% 0.40%
Specialised lending A2 0.32% 0.70% 0.34% 0.69% 0.50%
Intangible assets A3 0.15% 0.10% 0.03% 0.27% 0.14%
Equity holdings A4 0.84% 0.80% 0.51% 0.36% 0.63%
Deferred tax assets A5 0.20% 0.26% 0.33% 0.52% 0.32%
Standardised – retail exposures A6 0.02% 0.12% 0.20% 0.09% 0.11%
Margin lending A7 0.00% 0.02% 0.00% 0.02% 0.01%
Currency threshold adjustments A8 0.01% 0.06% 0.04% 0.08% 0.05%
Operational risk A9 0.00% 0.00% 0.06% 0.00% 0.01%
Counterparty credit risk A10 0.00% 0.00% 0.00% 0.00% 0.00%
IRRBB A11 0.40% 0.43% 0.16% 0.24% 0.30%
Category B adjustments: APRA less conservative
Investment in own shares B1 0.00% (0.05%) 0.00% 0.00% (0.01%)
Specialised lending – scaling factor B2 (0.04%) (0.08%) (0.07%) (0.09%) (0.07%)
Investment home loans B3 n/a n/a n/a n/a n/a
Total adjustment (standalone) 2.21% 2.91% 1.88% 2.64% 2.40%
CET1 (Basel Framework) ratio 10.76% 12.78% 10.80% 12.00% 11.55%
CET1 uplift 2.43% 3.48% 2.16% 3.18% 2.79%
Self-reported internationally harmonised CET1 ratio 10.50% 12.10% 10.46% 11.26% 11.06%
Additional adjustments
Undrawn corporate lending EAD C1 0.34% 0.32% 0.23% 0.36% 0.31%
Unsecured corporate lending LGD C2 1.02% 0.83% 0.61% 0.67% 0.79%
Total adjustment (standalone) 1.37% 1.15% 0.84% 1.02% 1.09%
Internationally comparable CET1 ratio 12.19% 13.98% 11.67% 13.07% 12.69%
Source: Individual bank data, PwC analysis, 2014.
*Note: Refer to appendix B for more detail.
Refer to appendix G for abbreviated terms.
Australian major banks - detailed analysis of differences between Australian CET1 (APRA) and International comparable CET1 ratio
Australian Bankers' Association
PwC 21
Table A2 – Summary of CET1 adjustments (in A$ billions)
Capital and RWA values have been rounded to the nearest $ billion. All totals and capital ratios have been rounded to 2 decimal places from source data.
(Refer to the following page for notes)
ANZ CBA NAB WBC
As at: 31/03/2014 30/06/2014 31/03/2014 31/03/2014
$ billions Ref Capital RWA Capital RWA Capital RWA Capital RWA
CET1 (APRA) 30.0 360.7 31.4 337.7 31.7 367.2 28.5 322.5
Category A adjustments: APRA more conservative
Mortgage LGD (20% floor) A1 0.0 (13.3) 0.0 (19.0) 0.0 (11.7) 0.0 (16.3)
Specialised lending A2 0.0 (13.2) 0.0 (23.7) 0.0 (13.8) 0.0 (23.4)
Intangible assets A3 0.6 1.0 0.4 0.4 0.1 0.2 1.0 1.1
Equity holdings A4 4.0 10.4 3.8 11.0 2.4 6.1 1.7 5.9
Deferred tax assets A5 0.9 2.3 1.2 2.9 1.5 3.9 2.2 5.5
Standardised – retail exposures A6 0.0 (0.8) 0.0 (4.4) 0.0 (8.5) 0.0 (3.3)
Margin lending A7 0.0 (0.0) 0.0 (0.7) 0.0 (0.2) 0.0 (0.6)
Currency threshold adjustments A8 0.0 (0.6) 0.0 (2.1) 0.0 (1.7) 0.0 (2.9)
Operational risk A9 0.0 0.0 0.0 0.0 0.0 (2.4) 0.0 0.0
Counterparty credit risk A10 0.0 0.0 0.0 0.0 0.0 (0.0) 0.0 0.0
IRRBB A11 0.0 (16.4) 0.0 (14.8) 0.0 (6.8) 0.0 (8.5)
Category B adjustments: APRA less conservative
Investment in own shares B1 0.0 0.0 (0.2) 0.0 0.0 0.0 0.0 0.0
Specialised lending – scaling factor B2 0.0 1.7 0.0 2.9 0.0 2.8 0.0 3.2
Investment home loans B3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Adjustment for expected loss* 0.1 0.0 0.5 0.0 0.4 0.0 0.7 0.0
Total adjustment 5.7 (28.8) 5.7 (47.3) 4.5 (32.0) 5.5 (39.3)
CET1 (Basel Framework) 35.7 331.9 37.1 290.4 36.2 335.2 34.0 283.2
CET1 ratio (Basel Framework) 10.76% 12.78% 10.80% 12.00%
Category C adjustments
Undrawn corporate lending EAD C1 0.0 (10.2) 0.0 (7.1) 0.0 (6.8) 0.0 (8.2)
Unsecured corporate lending LGD C2 0.0 (28.8) 0.0 (17.8) 0.0 (18.0) 0.0 (14.9)
Total other 0.0 (39.1) 0.0 (24.9) 0.0 (24.9) 0.0 (23.1)
Internationally comparable CET1 / RWA 35.7 292.8 37.1 265.6 36.2 310.3 34.0 260.1
Internationally comparable CET1 ratio** 12.19% 13.98% 11.67% 13.07%
Table A2 continues on the following page.
Australian major banks - detailed analysis of differences between Australian CET1 (APRA) and International comparable CET1 ratio
Australian Bankers' Association
PwC 22
ANZ CBA NAB WBC
As at: 31/03/2014 30/06/2014 31/03/2014 31/03/2014
$ billions Ref Capital RWA Capital RWA Capital RWA Capital RWA
Other jurisdiction specific adjustments from International comparable CET1 ratios
UK Adjustment
Total adjustment (standalone) (1.9) 9.2 (3.5) 16.7 (2.3) 8.8 (2.8) 19.3
CET1 (UK) 33.8 302.0 33.6 282.2 33.9 319.1 31.2 279.5
CET1 ratio (UK) 11.20% 11.90% 10.61% 11.16%
Singapore Adjustment
Total adjustment (standalone) 0.0 7.6 0.0 14.6 0.0 4.5 0.0 15.3
CET1 (Singapore) 35.7 300.5 37.1 280.1 36.2 314.9 34.0 275.5
CET1 ratio (Singapore) 11.88% 13.25% 11.50% 12.34%
Germany Adjustment
Total adjustment (standalone) (1.9) 0.0 (3.5) 0.0 (2.3) 0.0 (2.8) 0.0
CET1 (Germany) 33.8 292.8 33.6 265.6 33.9 310.3 31.2 260.1
CET1 ratio (Germany) 11.55% 12.65% 10.91% 11.99%
Source: Individual bank data, PwC analysis, 2014.
Refer to appendix G for abbreviated terms.
*Note: Any adjustment to risk weighted assets also potentially reduces expected loss (EL), which in turn may reduce the deduction taken by Australian major banks for the excess of
expected loss over eligible provisions. We have made one single adjustment to reduce this EL deduction, rather than allocating the benefit to specific adjustments. The total EL
add back to CET1 is limited to the deduction already taken in APRA reporting. The impact in table A1 (in bps) of this item is included in the cumulative capital ratio, and so is a
reconciling item between the sum of stand-alone adjustments and the cumulative impact.
**Note: The ratios for CET1 (Canada), CET1 (Swiss) and CET1 (Japanese) are equal to the Internationally comparable CET1 ratio above.
Australian Bankers' Association
PwC 23
Appendix B Summary of differences and related adjustments
*Ref Description Nature of adjustment Primary impact
Degree of
judgement required
Category A: APRA more conservative
A1 Mortgage LGD (20% floor) Reduce LGD floor from 20 per cent floor to 15 per cent flat for residential
mortgage portfolios.
?RWA
A2 Specialised lending Move loan portfolio(s) from supervisory slotting to IRB approach ?RWA
A3 Intangible assets Add back to CET1 additional deductions as required by APRA (e.g. capitalised
expenses).
?Capital
A4 Equity holdings Add back to CET1 additional deductions as required by APRA. ?RWA?Capital
A5 Deferred tax assets Add back to CET1 additional deductions as required by APRA. ?RWA ?Capital
A6 Standardised – retail exposures Reduce risk weights to 35 per cent for residential mortgages; and 100 per cent to
75 per cent for other retail loans.
?RWA
A7 Margin lending Reduce risk weight below APRA 20 per cent (standardised portfolios). ?RWA
A8 Currency threshold adjustments Increasing $A threshold for inclusion in retail/SME portfolios. ?RWA
A9 Operational risk Remove more conservative loss definitions and modelling assumptions. ?RWA
A10 Counterparty credit risk Reduce EAD for some counterparty credit risk. ?RWA
A11 IRRBB Remove IRRBB risk weighted assets from Pillar 1 capital requirements. ?RWA
Category B: APRA less conservative (material or potentially material)
B1 Investment in own shares Additional deductions for selected own shares held by group members. ?Capital
B2 Specialised lending – scaling
factor
Apply 1.06 scaling factor for specialised lending. ?RWA
Summary of differences and related adjustments
Australian Bankers' Association
PwC 24
*Ref Description Nature of adjustment Primary impact
Degree of
judgement required
Category C: Other adjustments
C1 Undrawn corporate lending EAD Reduce EAD on corporate undrawn exposures to 75 per cent. ?RWA
C2 Unsecured corporate lending LGD Reduce LGD to 45 per cent for unsecured corporate credit. ?RWA
C3 Sovereign LGD floor 45% Increase LGD to 45 per cent for sovereign exposures. ?RWA
C4 Foreseeable dividend Deduct foreseeable dividend from CET1. ?Capital
*Note: Refer to appendices C and D for more detail.
KEY
Primary impact Degree of judgement required
This represents the impact of the adjustment on the capital ratio. Each adjustments includes an element of judgement to be made when quantifying its'
impact on either the capital base or the risk weighted asset. The degree of judgement
required is indicated using the scale below:
Improve capital ratio (decrease risk weighted assets or increase capital base) Lower
Reduce capital ratio (increase risk weighted asset or decrease capital base) Higher
Note: The table above indicates the primary impact.
Australian Bankers' Association
PwC 25
Appendix C Areas where APRA’s approach to calculating
CET1 differs fromRCAP (Australia) and other adjustments for
international comparability
The table below details the list of differences where APRA adopts a more conservative approach than the BCBS minimum capital requirements (“Category A”). A
“more conservative” approach is deemed to be those differences leading to higher risk weighted assets or lower capital base.
In addition, these differences having been assessed as being applicable to the four major banks, and which are material or potentially material, have therefore been
considered in the analysis (items marked with ?).
Those differences identified as immaterial have not been examined further. Furthermore, any differences not applicable (n/a) to the four major banks for the
purposes of this study, have also been identified. For full details on the treatment of these differences in the analysis performed, refer to the “Approach” section in
appendix E.
Category A: APRA more conservative
Ref Description
Source Ref:
RCAP Applicability
A1 Mortgage LGD - 20% floor P.17 ?
A2 Specialised lending – prescribe slotting approach P.17 ?
A3 Intangible assets – additional deductions 10.1 ?
Own shares trading limits – additional deductions 10.2 Immaterial
A4 Reciprocal cross-holdings – additional deductions 10.3 ?
A4 Equity holdings (financial entities) – additional deductions 10.4 ?
A5 Deferred tax assets – additional deductions 10.5 ?
Basel III capital ratios transitional arrangements - not applied 10.6 n/a
Basel III capital instruments transitional arrangements - not applied 10.7 n/a
Basel III capital buffers transitional arrangements – not applied 10.8 n/a
Areas where APRA’s approach to calculating CET1 differs from RCAP (Australia) and other adjustments for international comparability
Australian Bankers' Association
PwC 26
Ref Description
Source Ref:
RCAP Applicability
A6 Standardised retail exposures – risk weight 100% 10.9 ?
A6 Standardised retail mortgage risk – risk weight ? 35% 10.10 ?
A7 Margin lending exposures - risk weight ? 20% 10.11 ?
A7 Margin lending – IRB approach not allowed 10.12 ?
A8 Small business exposures - threshold of $1M 10.13 ?
A8 Retail revolving exposure – threshold of $100K 10.14 ?
A8 SMEs– $50M turnover threshold 10.15 ?
Foundation IRB - other collateral not recognised 10.16 FIRB banks only
Foundation IRB - 100% CCF for commitments etc 10.17 FIRB banks only
Excess eligible provisions – not included in capital 10.18 Total capital only
Securitisation originating bank– wider definition 10.19 Immaterial
Securitisation implicit support– additional prohibitions 10.20 Immaterial
Operational risk foreign bank subsidiaries – additional conditions 10.21 n/a
Operational risk AMA criteria 10.22 Immaterial
A9 Operational risk AMA quantitative standards 10.23 Low materiality (only quantified
by one bank)
A9 Operational Risk - fraud related losses 10.24 Low materiality (only quantified
by one bank)
A10 Counterparty Credit Risk -EAD > 0 10.25 Low materiality (only quantified
by one bank)
Correlation trading portfolio 10.26 Immaterial
A11 IRRBB - Pillar 1 inclusion 10.27 ?
Areas where APRA’s approach to calculating CET1 differs from RCAP (Australia) and other adjustments for international comparability
Australian Bankers' Association
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CATEGORY B: RCAP Findings – APRA less conservative (material or potentially material)
The table below details the list of differences where APRA adopts a less conservative approach than the BCBS minimum capital requirements (“Category B”). A “less
conservative” approach is deemed to be those differences leading to lower risk weighted assets or higher capital base. Note, these differences were identified as part
of the RCAP findings as material or potentially material, and have therefore been considered in the analysis (items marked with ?). A range of RCAP findings
identified as immaterial have not been examined further.
Ref Description
Source Ref:
RCAP Applicability
B1 Investment in own shares P.24 ?
B2 1.06 scaling factor P.30 ?
B3 Non-owner occupied mortgages (potentially material) P.31 ?
Minimum requirement for loss absorbency at the point of non-viability (material) P.25 Total capital only
Indirect funding of own capital instruments (not material) P.13 Immaterial
CATEGORY C: Other adjustments for international comparability
We have identified further adjustments for other recognised differences (such as risk modelling parameters and national discretions).
Ref Description Cross ref: Applicability
APRA more conservative – adjustments applied in deriving Internationally comparable CET1
C1 Undrawn corporate lending EAD See section 4.1.2 of this
report
?
C2 Unsecured corporate lending LGD See section 4.1.2 of this
report
?
APRA less conservative than some jurisdictions – adjustments applied to jurisdiction comparatives as applicable (see Appendix D)
C3 Sovereign LGD floor 45%: increase LGD to 45 per cent for sovereign exposures (UK only) n/a ?
C4 Foreseeable dividend: deduct foreseeable dividend from CET1 (UK / Europe) n/a ?
Australian Bankers' Association
PwC 28
Appendix D Areas of difference between Australia and peer
group jurisdictions (refers to section 3.4)
Table D1 – Jurisdiction specific material differences
*Ref Description Australia UK Germany Switzerland Canada Singapore Japan
APRA more conservative
A1 LGD mortgage floor 20% 10% 10% 10% 10% 10% 10%
A2 Slotting required for specialised
lending
Y: additionally
APRA risk weights
more conservative
than BCBS
Partial: income
producing real-
estate only.
UK risk weights
equivalent to
BCBS
N N N Y: apply BCBS
risk weights
N
A4 Equity holdings: full deduction,
no threshold treatment
Y N N N N N N
A5 Deferred tax assets: full
deduction, no threshold
treatment
Y N N N N N N
A12 IRRBB: included in Pillar 1
RWAs
Y N N N N N N
C1 EAD for undrawn corporate Y N N N N N N
C2 LGD for unsecured corporate Y N N N N N N
APRA less conservative
C3 Sovereign LGD floor of 45% N Y N N N N N
C4 Deduct foreseeable dividend N Y Y N N N N
Areas of difference between Australia and peer group jurisdictions (refers to section 3.4)
Australian Bankers' Association
PwC 29
Table D2 – Foreseeable dividend adjustments applied
The table below summarises the foreseeable dividend adjustments which have been applied in Figure 3. Not all banks who deduct foreseeable dividends publish the
impact of this adjustment on fully loaded CET1. In such cases we have used the adjustment disclosed to transitional CET1 and applied to fully loaded CET1. The
difference is likely to be negligible.
Bank
Reported fully loaded
CET1
Foreseeable dividend
adjustment
Internationally comparable
CET1
Nordea 15.20% 0.62% 15.82%
Intesa Sanpaolo 12.90% 0.09% 12.99%
Deutsche Bank AG 11.50% 0.14% 11.64%
HSBC Holdings Plc. 11.30% 0.13% 11.43%
Standard Chartered 10.70% 0.17% 10.87%
Societe Generale 10.20% 0.31% 10.51%
UniCredit 10.37% 0.03% 10.40%
BNP Paribas 10.00% 0.30% 10.30%
Barclays 9.90% 0.14% 10.04%
Australian Bankers' Association
PwC 30
Appendix E Analysis of international jurisdictions RCAPs
Jurisdictions which we have used for comparison purposes have had RCAP Reports completed. In this Appendix we have summarised the findings from those RCAPs
for two purposes: (i) findings where a jurisdiction has not fully applied the Basel Framework (and so APRA may be more conservative if they have fully applied the
Framework) and (ii) areas where that jurisdiction has been identified as being more conservative than the Basel Framework (and where APRA may be less
conservative than that jurisdiction if they have applied the Basel minimum). We have assessed each finding and assessed whether it is a factor which requires
adjustment in this study.
Canada (June 2014)
RCAP differences
Area Finding PwC Comment
Definition of capital
Inclusion of Preference Share Capital Does not require preferred shares (accounted as liabilities & incl. in Additional Tier 1) to
include the automatic conversion trigger at the capital ratio of 5.125 per cent of risk
weighted assets (as required by Basel).
The focus of this report is on fully implemented
CET1. Accordingly no adjustment has been made
for this item.
Areas where the Canadian rules are stricter than the Basel minimum
Area Finding PwC Comment
Definition of capital and transitional
arrangements
Office of the Superintendent of Financial Institutions (OSFI) expects all banking
institutions to attain target capital ratios equal to or greater than the 2019 capital ratios
from 2013.
Equivalent to APRA. Does not impact calculation
of disclosed capital ratios. No adjustment made.
The Canadian Capital Adequacy Requirements (CAR) Guideline requires that any
discretionary repurchases of common shares are subject to the prior approval of the
Superintendent.
Does not impact calculation of disclosed capital
ratios. No adjustment made.
Paragraphs 16 and 29 of the CAR Guideline require that amendments to the terms and
conditions of additional Tier 1 and Tier 2 instruments are subject to the prior approval of
the Superintendent.
Does not impact calculation of disclosed capital
ratios. Not applicable to CET1. No adjustment
made.
Counterparty credit risk (Annex 4) OSFI’s expectation that banks will provide documented justification for their use of two
different pricing models, in the case where the pricing model used to calculate
counterparty credit risk exposure is different to the pricing model used to calculate
market risk over a short horizon.
Qualitative requirement. Does not impact
calculation of disclosed capital ratios. No
adjustment made.
OSFI’s expectation that banks will provide documented justification for their choice of
calibration methods, when two different calibration methods are used for different
parameters within the effective expected positive exposure model.
Qualitative requirement. Does not impact
calculation of disclosed capital ratios. No
adjustment made.
Market Risk OSFI does not allow banks using the Standardised Approach to include unrated securities
in the “qualifying” category for the computation of interest rate risk.
Australian major banks are advanced. Not
applicable. No adjustment made.
OSFI does not fully implement the futures-related arbitrage strategies that attract lower
market risk capital charges.
OFSI approach similar to APRA. No adjustment
made.
Analysis of international jurisdictions RCAPs
Australian Bankers' Association
PwC 31
Switzerland (June 2013)
Areas where the Swiss rules are potentially less strict than the Basel minimum
The RCAP process identified 10 “negative deviations” from the Basel text for the “International Approach”, which had not yet been rectified by amendments to the
Swiss rules at the time of the assessment. The RCAP measured the cumulative average impact of these items on CET1 as 5bps. We consider this immaterial for this
exercise.
Areas where the Swiss rules are stricter than the Basel minimum
None noted in the RCAP.
Europe (includes Germany: preliminary report October 2012)
Areas where the EU rules are potentially less strict than the Basel minimum
The RCAP process identified a number of material and potentially material findings. The EU has challenged a number of the findings, and the assessment remains
preliminary. We have not made any additional adjustments to reflect these findings (which may increase Australian major bank capital ratios in comparison to EU
institutions).
Areas where the European rules are stricter than the Basel minimum
Area Finding PwC Comment
Credit risk: IRB Basel allows the risk weight for short-term, self-liquidating letters of credit with unrated
banks to be lower than the risk weight of the bank’s sovereign of incorporation; the
Capital Requirements Regulation (CRR) does not include a similar provision.
Negligible
Analysis of international jurisdictions RCAPs
Australian Bankers' Association
PwC 32
Singapore (March 2013)
RCAP differences
Area Finding PwC Comment
Credit risk: Standardised Approach
Expanded list of eligible financial
collateral
Structured deposits inclusion in the list of eligible financial collateral
deemed inappropriate since the structured deposits are not
comparable to deposits treated as “cash” and have higher risk.
Only impacts 2 per cent of the deposits in Singapore. Applicable to
standardised approach. Negligible impact for Australian majors. No
further adjustment necessary for Australian major bank ratios to
compare to Singapore.
Credit risk: Internal Ratings-Based Approach
Definition of Retail Exposures (PM) Allows some exposures to individuals ineligible for retail exposure
treatment to be risk weighted at 100 per cent rather than being
considered corporate exposures category under the IRB Approach.
Also does not restrict the residential mortgage treatment of retail
exposures only to exposures to individuals that are owner-occupiers
of the property.
Similar to APRA approach. Determined as potentially material in
Singapore (some banks noted an increase in ratio, others a decrease).
No further adjustment necessary for Australian major bank ratios to
compare to Singapore.
Areas where the Singapore rules are stricter than the Basel minimum
Area Finding PwC Comment
Definition of capital and transitional
arrangements
Explicit CET1 capital adequacy requirement, to be set at 6.5 per cent (as compared to the
Basel III minimum of 4.5 per cent)
Does not impact calculation of disclosed capital
ratios. No adjustment applicable for this report.
Tier 1 capital adequacy requirement increased from the Basel III minimum of 6 per cent
to 8 per cent.
As above.
Japan (October 2012)
Areas where the Japanese rules are potentially less strict than the Basel minimum
The RCAP process noted that all identified gaps were noted to be non-material. No further adjustment necessary for Australian major bank ratios to compare to
Japan.
Areas where the Japanese rules are stricter than the Basel minimum
Extract from RCAP (Japan) Annex G: “The Japanese authorities have not listed any areas as super-equivalent compared to the Basel Framework.”
Australian Bankers' Association
PwC 33
Appendix F Extracts of rules pertaining to differences
The table below explains the differences between APRA’s implementation of Basel and the core Basel text, together with the approach we have adopted in this study.
“APRA v BCBS differences” are extracted directly from the BCBS’s RCAP (Australia).
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
Main Findings: Credit risk: Internal Ratings-Based approach
RCAP
pg.17
A1
Mortgage LGD
- 20% floor
Basel II para 266:
Owing to the potential for very long-run cycles in house prices
which short-term data may not adequately capture, during
this transition period, LGDs for retail exposures secured by
residential properties cannot be set below 10% for any sub-
segment of exposures to which the formula in paragraph 328
is applied. During the transition period the Committee will
review the potential need for continuation of this floor.
Basel Framework prescribes a 10% floor
for loss-given default of exposures secured
by residential mortgages that must be
applied at the sub segment of exposures to
which the risk weight asset formula is
applied. APRA prescribes a 20% floor. This
floor, however, is applied at the portfolio
level. While this is not strictly in
conformity with the letter and intent of the
Basel Framework, the risk that loss-given-
default estimates for sub-segments of
exposures declining below the Basel 10%
floor is deemed immaterial.
Apply a flat LGD assumption. See section
4.1.2 for further discussion of approach.
RCAP
pg.17
A2
Specialised
lending –
prescribe
slotting
approach
Basel II para 215 and 275:
215. Under the IRB approach, banks must categorise banking-
book exposures into broad classes of assets with different
underlying risk characteristics, subject to the definitions set
out below. The classes of assets are (a) corporate, (b)
sovereign, (c) bank, (d) retail, and (e) equity. Within the
corporate asset class, five sub-classes of specialised lending
are separately identified. Within the retail asset class, three
sub classes are separately identified. Within the corporate and
retail asset classes, a distinct treatment for purchased
receivables may also apply provided certain conditions are
met.
275. Banks that do not meet the requirements for the
estimation of PD under the corporate IRB approach will be
required to map their internal grades to five supervisory
categories, each of which is associated with a specific risk
weight.
APRA took a decision not to allow any
internal modelling of the specialised
lending (SL) risk parameters and to
prescribe the more conservative slotting
approach for all SL sub-asset classes.
The difference between the risk weighted
asset calculated using the supervisory
slotting methodology and the risk weighted
asset calculated using participant banks
internal corporate models was deducted
from the regulatory risk weighted asset.
The following modelling assumptions were
used :
? Current internally calculated PD, LGD
and EAD
? Exposures were moved to the
Corporate Other curve or the Other
SME curve depending on their
characteristics.
It is noted that the supervisory slotting
approach is a method defined by the Basel
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 34
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
Framework, and so arguably not a
departure. However, as noted in RCAP
(Australia), the unavailability of internal
modelling approaches for this portfolio is
an area of APRA conservatism.
Additionally, many comparable
jurisdictions (except Singapore) permit the
use of internal modelling for SL. We have
therefore concluded that it is appropriate
to estimate the impact on risk weighted
assets of using AIRB rather than slotting
for this portfolio.
Definition of capital and transitional arrangements
RCAP
Annex
10.1
A3
Intangible
assets –
additional
deductions
Basel III para 67:
Goodwill and all other intangibles must be deducted in the
calculation of Common Equity Tier 1, including any goodwill
included in the valuation of significant investments in the
capital of banking, financial and insurance entities that are
outside the scope of regulatory consolidation. With the
exception of mortgage servicing rights, the full amount is to be
deducted net of any associated deferred tax liability which
would be extinguished if the intangible assets become
impaired or derecognised under the relevant accounting
standards. The amount to be deducted in respect of mortgage
servicing rights is set out in the threshold deductions section
below.
Basel requires exposures classified as
intangible assets under International
Financial Reporting Standards to be
deducted from Common Equity Tier 1
(CET1) capital. In addition to these
exposures, APRA requires the deduction
from CET1 capital of certain other items
which APRA deems should be treated in a
similar fashion to intangibles (for example,
capitalised expenses, capitalised
transaction costs and mortgage servicing
rights).
Add back to CET1 the additional
deductions required by APRA.
These items were identified from the
following items included in capital
adequacy reports submitted to APRA
(ARF110).
2.6.1. Loan and lease origination fees and
commissions paid to mortgage originators
and brokers
2.6.2. Costs associated with debt raisings
2.6.3. Costs associated with issuing capital
instruments
2.6.5. Securitisation start-up costs
2.6.6. Other capitalised expenses
The above items were added to risk
weighted assets, calculated at a risk weight
of 100 per cent.
RCAP
Annex
10.2
n/a
Own shares
trading limits –
additional
deductions
Basel III para 78:
All of a bank’s investments in its own common shares,
whether held directly or indirectly, will be deducted in the
calculation of Common Equity Tier 1 (unless already
derecognised under the relevant accounting standards). In
addition, any own stock which the bank could be contractually
Basel requires that banks deduct
investments in own shares (treasury stock)
from CET1 capital. APRA also requires the
deduction of any unused portion of any
trading limits in own shares that have been
agreed with APRA.
Participant banks calculated the portion of
unused trading limits in their own shares
which are deducted from CET1. This item
was deemed immaterial, and so no
adjustment to add back to CET1 has been
applied in this study.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 35
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
obliged to purchase should be deducted in the calculation of
Common Equity Tier 1. The treatment described will apply
irrespective of the location of the exposure in the banking
book or the trading book. In addition:
? Gross long positions may be deducted net of short
positions in the same underlying exposure only if the short
positions involve no counterparty risk.
? Banks should look through holdings of index securities to
deduct exposures to own shares. However, gross long
positions in own shares resulting from holdings of index
securities may be netted against short position in own
shares resulting from short positions in the same
underlying index. In such cases the short positions may
involve counterparty risk (which will be subject to the
relevant counterparty credit risk charge).
This deduction is necessary to avoid the double counting of a
bank’s own capital. Certain accounting regimes do not permit
the recognition of treasury stock and so this deduction is only
relevant where recognition on the balance sheet is permitted.
The treatment seeks to remove the double counting that arises
from direct holdings, indirect holdings via index funds and
potential future holdings as a result of contractual obligations
to purchase own shares.
Following the same approach outlined above, banks must
deduct investments in their own Additional Tier 1 in the
calculation of their Additional Tier 1 capital and must deduct
investments in their own Tier 2 in the calculation of their Tier
2 capital.
RCAP
Annex
10.3
A4
Reciprocal
cross-holdings
– additional
deductions
Basel III para 79:
Reciprocal cross holdings of capital that are designed to
artificially inflate the capital position of banks will be
deducted in full. Banks must apply a “corresponding
deduction approach” to such investments in the capital of
other banks, other financial institutions and insurance
entities. This means the deduction should be applied to the
same component of capital for which the capital would qualify
if it was issued by the bank itself.
Basel requires reciprocal cross-holdings in
the capital of banking, financial and
insurance entities to be deducted from
CET1 capital. APRA requires the full
deduction of all holdings of capital of
banking, financial and insurance entities,
regardless of whether they are reciprocal.
Any reciprocal cross holdings as disclosed
on participant banks QIS were deducted
from CET1.
Other deductions (not reciprocal) are
treated as below.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 36
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
RCAP
Annex
10.4
A4
Equity
holdings
(financial
entities) –
additional
deductions
Basel III para 80–81:
80. The regulatory adjustment described in this section
applies to investments in the capital of banking, financial and
insurance entities that are outside the scope of regulatory
consolidation and where the bank does not own more than
10% of the issued common share capital of the entity. In
addition:
? Investments include direct, indirect and synthetic holdings
of capital instruments. For example, banks should look
through holdings of index securities to determine their
underlying holdings of capital.
? Holdings in both the banking book and trading book are to
be included. Capital includes common stock and all other
types of cash and synthetic capital instruments (e.g.
subordinated debt). It is the net long position that is to be
included (i.e. the gross long position net of short positions
in the same underlying exposure where the maturity of the
short position either matches the maturity of the long
position or has a residual maturity of at least one year).
? Underwriting positions held for five working days or less
can be excluded. Underwriting positions held for longer
than five working days must be included.
? If the capital instrument of the entity in which the bank
has invested does not meet the criteria for Common
Equity Tier 1, Additional Tier 1, or Tier 2 capital of the
bank, the capital is to be considered common shares for
the purposes of this regulatory adjustment.
? National discretion applies to allow banks, with prior
supervisory approval, to exclude temporarily certain
investments where these have been made in the context of
resolving or providing financial assistance to reorganise a
distressed institution.
81. If the total of all holdings listed above in aggregate exceed
10% of the bank’s common equity (after applying all other
regulatory adjustments in full listed prior to this one) then the
amount above 10% is required to be deducted, applying a
corresponding deduction approach. This means the deduction
should be applied to the same component of capital for which
the capital would qualify if it was issued by the bank itself.
Accordingly, the amount to be deducted from common equity
should be calculated as the total of all holdings which in
Basel does not require the deduction of the
aggregate amount of investments in the
capital of banking, financial and insurance
entities in which the bank owns less than
10% of the issued share capital of each
entity where this (aggregate) amount is
less than 10% of the bank’s adjusted CET1
capital. APRA requires the full amount of
such investments to be deducted from
CET1 capital.
The portion of equity investments in
financial and insurance entities below the
10 per cent threshold, as identified in each
participant banks’ QIS, was added back to
CET1. A corresponding adjustment was
added to risk weighted asset based on
Basel defined risk weights.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 37
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
aggregate exceed 10% of the bank’s common equity (as per
above) multiplied by the common equity holdings as a
percentage of the total capital holdings. This would result in a
common equity deduction which corresponds to the
proportion of total capital holdings held in common equity.
Similarly, the amount to be deducted from Additional Tier 1
capital should be calculated as the total of all holdings which
in aggregate exceed 10% of the bank’s common equity (as per
above) multiplied by the Additional Tier 1 capital holdings as
a percentage of the total capital holdings. The amount to be
deducted from Tier 2 capital should be calculated as the total
of all holdings which in aggregate exceed 10% of the bank’s
common equity (as per above) multiplied by the Tier 2 capital
holdings as a percentage of the total capital holdings.
RCAP
Annex
10.5
A5
Deferred tax
assets –
additional
deductions
Basel III para 87–89:
87. Instead of a full deduction, the following items may each
receive limited recognition when calculating Common Equity
Tier 1, with recognition capped at 10% of the bank’s common
equity (after the application of all regulatory adjustments set
out in paragraphs 67 to 85):
? Significant investments in the common shares of
unconsolidated financial institutions (banks, insurance
and other financial entities) as referred to in paragraph
84;
? Mortgage servicing rights (MSRs); and
? DTAs that arise from temporary differences.
88. On 1 January 2013, a bank must deduct the amount by
which the aggregate of the three items above exceeds 15% of
its common equity component of Tier 1 (calculated prior to
the deduction of these items but after application of all other
regulatory adjustments applied in the calculation of Common
Equity Tier 1). The items included in the 15% aggregate limit
are subject to full disclosure. As of 1 January 2018, the
calculation of the 15% limit will be subject to the following
treatment: the amount of the three items that remains
recognised after the application of all regulatory adjustments
must not exceed 15% of the CET1 capital, calculated after all
regulatory adjustments. See Annex 2 for an example.
89. The amount of the three items that are not deducted in the
calculation of Common Equity Tier 1 will be risk weighted at
250%.
APRA did not adopt the threshold
deduction approach for deferred tax assets
for temporary differences, significant
investments in unconsolidated financial
entities and mortgage servicing rights.
Instead, these exposures must be deducted
in full from CET1 capital.
The portion of Deferred Tax Assets within
the Basel threshold as calculated in the
participant banks QIS was added back to
CET1; a corresponding addition was added
to risk weighted assets, at a weighting of
250 per cent.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 38
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
RCAP
Annex
10.6
n/a
Basel III
capital ratios
transitional
arrangements -
not applied
Basel III para 94:
The transitional arrangements for implementing the new
standards will help to ensure that the banking sector can meet
the higher capital standards through reasonable earnings
retention and capital raising, while still supporting lending to
the economy. The transitional arrangements include:
a) National implementation by member countries will begin
on 1 January 2013. Member countries must translate the
rules into national laws and regulations before this date.
As of 1 January 2013, banks will be required to meet the
following new minimum requirements in relation to risk
weighted assets (RWAs):
– 3.5% Common Equity Tier 1/RWAs;
– 4.5% Tier 1 capital/RWAs, and
– 8.0% total capital/RWAs.
b) The minimum Common Equity Tier 1 and Tier 1
requirements will be phased in between 1 January 2013
and 1 January 2015. On 1 January 2013, the minimum
Common Equity Tier 1 requirement will rise from the
current 2% level to 3.5%. The Tier 1 capital requirement
will rise from 4% to 4.5%. On 1 January 2014, banks will
have to meet a 4% minimum Common Equity Tier 1
requirement and a Tier 1 requirement of 5.5%. On 1
January 2015, banks will have to meet the 4.5% Common
Equity Tier 1 and the 6% Tier 1 requirements. The total
capital requirement remains at the existing level of 8.0%
and so does not need to be phased in. The difference
between the total capital requirement of 8.0% and the
Tier 1 requirement can be met with Tier 2 and higher
forms of capital.
See Basel III for paras (c) -(g) for further details of
transitional arrangements.
APRA did not provide transition for the
Basel III minimum capital ratios,
regulatory adjustments (deductions) or the
treatment of minority interest and other
capital held by third parties. These
requirements came into effect on 1 January
2013.
This area of conservatism impacts absolute
levels of capital required, but does not
impact the actual calculation of a disclosed
ratio for comparison purposes.
Additionally the focus of this report is on a
full implementation basis.
Accordingly no adjustment has been made
for this item.
RCAP
Annex
10.7
n/a
Basel III
capital
instruments
transitional
arrangements -
not applied
Basel III para 95–96:
95. Capital instruments that do not meet the criteria for
inclusion in Common Equity Tier 1 will be excluded from
Common Equity Tier 1 as of 1 January 2013. However,
instruments meeting the following three conditions will be
phased out over the same horizon described in paragraph
Basel details transitional arrangements for
capital instruments issued before 1
January 2013. APRA had more stringent
transitional arrangements for capital
instruments issued before this date.
The focus of this report is on fully
implemented CET1.
Accordingly no adjustment has been made
for this item.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 39
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
94(g): (1) they are issued by a non-joint stock company33; (2)
they are treated as equity under the prevailing accounting
standards; and (3) they receive unlimited recognition as part
of Tier 1 capital under current national banking law.
96. Only those instruments issued before 12 September 2010
qualify for the above transition arrangements.
RCAP
Annex
10.8
n/a
Basel III
capital buffers
transitional
arrangements
– not applied
Basel III para 133–135 and 150:
133. The capital conservation buffer will be phased in between
1 January 2016 and year end 2018 becoming fully effective on
1 January 2019. It will begin at 0.625% of RWAs on 1 January
2016 and increase each subsequent year by an additional
0.625 percentage points, to reach its final level of 2.5% of
RWAs on 1 January 2019. Countries that experience excessive
credit growth should consider accelerating the build up of the
capital conservation buffer and the countercyclical buffer.
National authorities have the discretion to impose shorter
transition periods and should do so where appropriate.
134. Banks that already meet the minimum ratio requirement
during the transition period but remain below the 7%
Common Equity Tier 1 target (minimum plus conservation
buffer) should maintain prudent earnings retention policies
with a view to meeting the conservation buffer as soon as
reasonably possible.
135. The division of the buffer into quartiles that determine
the minimum capital conservation ratios will begin on 1
January 2016. These quartiles will expand as the capital
conservation buffer is phased in and will take into account any
countercyclical buffer in effect during this period.
150. The countercyclical buffer regime will be phased-in in
parallel with the capital conservation buffer between 1
January 2016 and year end 2018 becoming fully effective on 1
January 2019. This means that the maximum countercyclical
buffer requirement will begin at 0.625% of RWAs on 1
January 2016 and increase each subsequent year by an
additional 0.625 percentage points, to reach its final
maximum of 2.5% of RWAs on 1 January 2019. Countries that
experience excessive credit growth during this transition
period will consider accelerating the build up of the capital
conservation buffer and the countercyclical buffer. In
APRA will not implement the transitional
arrangements for the capital conservation
and countercyclical capital buffers.
Authorised deposit-taking institutions
(ADIs) will be required to meet these in
full from 1 January 2016.
This area of conservatism impacts absolute
levels of capital required, but does not
impact the actual calculation of a disclosed
ratio for comparison purposes.
Additionally the focus of this report is on a
full implementation basis.
Accordingly no adjustment has been made
for this item.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 40
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
addition, jurisdictions may choose to implement larger
countercyclical buffer requirements. In such cases the
reciprocity provisions of the regime will not apply to the
additional amounts or earlier time-frames.
Credit risk: Standardised Approach
RCAP
Annex
10.9
A6
Retail
exposures –
risk weight
100%
Basel II para 69:
69. Claims that qualify under the criteria listed in paragraph
70 may be considered as retail claims for regulatory capital
purposes and included in a regulatory retail portfolio.
Exposures included in such a portfolio may be risk-weighted
at 75%, except as provided in paragraph 75 for past due loans.
APRA did not adopt the 75% risk weight
for retail exposures; such exposures are
risk weighted at 100%.
Reduce risk weighting to 75 per cent on
relevant portfolios subject to the
standardised approach.
RCAP
Annex
10.10
A6
Retail
mortgage risk
– risk weight ?
35%
Basel II para 72:
72. Lending fully secured by mortgages on residential
property that is or will be occupied by the borrower, or that is
rented, will be risk weighted at 35%. In applying the 35%
weight, the supervisory authorities should satisfy themselves,
according to their national arrangements for the provision of
housing finance, that this concessionary weight is applied
restrictively for residential purposes and in accordance with
strict prudential criteria, such as the existence of substantial
margin of additional security over the amount of the loan
based on strict valuation rules. Supervisors should increase
the standard risk weight where they judge the criteria are not
met.
Basel allows claims secured by residential
property to be risk weighted at 35%. APRA
introduced a residential mortgage risk
weight matrix whereby the risk weights for
exposures secured by residential property
range from 35% to 100%.
Reduce risk weighting to 35 per cent on
relevant portfolios subject to the
standardised approach.
RCAP
Annex
10.11
A7
Margin lending
exposures -
risk weight ?
20%
Basel II Credit risk mitigation:
145. The following collateral instruments are eligible for
recognition in the simple approach:
a) Cash (as well as certificates of deposit or comparable
instruments issued by the lending bank) on deposit with
the bank which is incurring the counterparty exposure
b) Gold.
c) Debt securities rated by a recognised external credit
assessment institution where these are either:
– at least BB- when issued by sovereigns or PSEs that are
treated as sovereigns by the national supervisor; or
– at least BBB- when issued by other entities (including
Basel II credit risk mitigation techniques
would generally result in a minimal capital
charge for margin lending exposures.
Instead, APRA has set a 20% risk weight
for margin lending exposures secured by
listed instruments on recognised
exchanges (unless subject to deduction
under APS 111). Otherwise (e.g. where the
underlying instruments are unlisted) the
ADI must treat the exposure as a secured
loan (unless subject to deduction under
APS 111).
Reduce risk weighting to reflect impact of
applying qualifying collateral to margin
lending in line with Basel text.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 41
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
banks and securities firms); or
– at least A-3/P-3 for short-term debt instruments.
d) Debt securities not rated by a recognised external credit
assessment institution where these are:
– issued by a bank; and
– listed on a recognised exchange; and
– classified as senior debt; and
– all rated issues of the same seniority by the issuing
bank must be rated at least BBB- or A-3/P-3 by a
recognised external credit assessment institution; and
– the bank holding the securities as collateral has no
information to suggest that the issue justifies a rating
below BBB- or A-3/P-3 (as applicable); and
– the supervisor is sufficiently confident about the
market liquidity of the security.
e) Equities (including convertible bonds) that are included
in a main index.
f) Undertakings for Collective Investments in Transferable
Securities (UCITS) and mutual funds where:
– a price for the units is publicly quoted daily; and
– the UCITS/mutual fund is limited to investing in the
instruments listed in this paragraph
Note: RCAP refers to Basel II ‘Credit Risk Mitigation’ as the
relevant Basel reference. Only Basel II paragraph 145 has
been included in this table.
Credit risk: Internal Ratings-Based approach
RCAP
Annex
10.12
A7
Margin lending
– IRB
approach not
allowed
Basel II para 215:
Under the IRB approach, banks must categorise banking-book
exposures into broad classes of assets with different
underlying risk characteristics, subject to the definitions set
out below. The classes of assets are (a) corporate, (b)
sovereign, (c) bank, (d) retail, and (e) equity. Within the
corporate asset class, five sub-classes of specialised lending
are separately identified. Within the retail asset class, three
sub-classes are separately identified. Within the corporate and
retail asset classes, a distinct treatment for purchased
receivables may also apply provided certain conditions are
met.
Under the Basel IRB approach, banks must
categorise banking book exposures into
five broad asset classes: (a) corporate, (b)
sovereign, (c) bank, (d) retail and (e)
equity. APRA does not include margin
lending exposures in these IRB portfolios.
The risk weights for such exposures are the
same as under APRA’s standardised
approach (refer to item 11 above). This
results in a considerably higher capital
charge than would be expected under the
Basel IRB treatment.
As APRA does not permit inclusion of
margin lending in the IRB portfolio
participant banks were not able to quantify
the risk weighted asset impact if these
exposures to be measured using the IRB
approach. The impact was quantified
under the standardised approach in item 11
above.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 42
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
RCAP
Annex
10.13
A8
Small business
exposures -
threshold of
$1M
Basel II para 232:
The exposure must be one of a large pool of exposures, which
are managed by the bank on a pooled basis. Supervisors may
choose to set a minimum number of exposures within a pool
for exposures in that pool to be treated as retail.
? Small business exposures below €1 million may be treated
as retail exposures if the bank treats such exposures in its
internal risk management systems consistently over time
and in the same manner as other retail exposures. This
requires that such an exposure be originated in a similar
manner to other retail exposures. Furthermore, it must
not be managed individually in a way comparable to
corporate exposures, but rather as part of a portfolio
segment or pool of exposures with similar risk
characteristics for purposes of risk assessment and
quantification. However, this does not preclude retail
exposures from being treated individually at some stages
of the risk management process. The fact that an exposure
is rated individually does not by itself deny the eligibility
as a retail exposure.
Basel II set a threshold of EUR 1 million
for small business exposures to be included
in the retail portfolio. APRA converted this
threshold to Australian dollars on a 1:1
basis (effectively setting a lower
threshold).
Participant banks calculated the risk
weighted asset impact if the current retail
threshold was increased to $1.6m from
$1m.
RCAP
Annex
10.14
A8
Retail
revolving
exposure –
threshold of
$100K
Basel II para 234:
All of the following criteria must be satisfied for a sub-
portfolio to be treated as a qualifying revolving retail exposure
(QRRE). These criteria must be applied at a sub-portfolio
level consistent with the bank’s segmentation of its retail
activities generally. Segmentation at the national or country
level (or below) should be the general rule.
a) The exposures are revolving, unsecured, and
uncommitted (both contractually and in practice). In this
context, revolving exposures are defined as those where
customers’ outstanding balances are permitted to
fluctuate based on their decisions to borrow and repay,
up to a limit established by the bank.
b) The exposures are to individuals.
c) The maximum exposure to a single individual in the sub-
portfolio is €100,000 or less.
d) Because the asset correlation assumptions for the QRRE
risk weight function are markedly below those for the
other retail risk weight function at low PD values, banks
Basel II sets the maximum exposure to a
single individual in the qualifying
revolving retail sub-portfolio at EUR 1
million. APRA converted this threshold to
Australian dollars on a 1:1 basis (effectively
setting a lower threshold). In addition,
APRA does not allow exposures for
business purposes to be included in the
qualifying revolving retail portfolio. Such
(otherwise qualifying) exposures fall into
the other retail portfolio (or possibly the
corporate portfolio), which results in a
higher capital requirement.
Note: Error noted in RCAP - per Basel II
para 234: maximum exposure to single
individual in the sub-portfolio is €100,000
or less.
Participant banks calculated the risk
weighted asset impact if the current retail
threshold was increased to $160k from
$100k.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 43
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
must demonstrate that the use of the QRRE risk weight
function is constrained to portfolios that have exhibited
low volatility of loss rates, relative to their average level of
loss rates, especially within the low PD bands.
Supervisors will review the relative volatility of loss rates
across the QRRE subportfolios, as well as the aggregate
QRRE portfolio, and intend to share information on the
typical characteristics of QRRE loss rates across
jurisdictions.
e) Data on loss rates for the sub-portfolio must be retained
in order to allow analysis of the volatility of loss rates.
f) The supervisor must concur that treatment as a
qualifying revolving retail exposure is consistent with the
underlying risk characteristics of the sub-portfolio.
RCAP
Annex
10.15
A8
SMEs– $50M
turnover
threshold
Basel II para 273:
Under the IRB approach for corporate credits, banks will be
permitted to separately distinguish exposures to SME
borrowers (defined as corporate exposures where the reported
sales for the consolidated group of which the firm is a part is
less than €50 million) from those to large firms. A firm-size
adjustment (i.e. 0.04 x (1 – (S – 5) / 45)) is made to the
corporate risk weight formula for exposures to SME
borrowers. S is expressed as total annual sales in millions of
euros with values of S falling in the range of equal to or less
than €50 million or greater than or equal to €5 million.
Reported sales of less than €5 million will be treated as if they
were equivalent to €5 million for the purposes of the firm-size
adjustment for SME borrowers.
The Basel II firm size adjustment for small
and medium-sized entities that are risk
weighted on the corporate curve cuts out
for firms with turnover above EUR 50
million. APRA converted this threshold to
Australian dollars on a 1:1 basis (effectively
setting a lower threshold).
Participant banks calculated the impact on
RWAs of increasing the SME threshold
from $50m turnover to $80m.
RCAP
Annex
10.16
n/a
Foundation
IRB - other
collateral not
recognised
Basel II para 295 :
The methodology for determining the effective LGD under the
foundation approach for cases where banks have taken
eligible IRB collateral to secure a corporate exposure is as
follows.
? Exposures where the minimum eligibility requirements
are met, but the ratio of the current value of the collateral
received (C) to the current value of the exposure (E) is
below a threshold level of C* (i.e. the required minimum
collateralisation level for the exposure) would receive the
appropriate LGD for unsecured exposures or those
Although Basel II allows other collateral to
be recognised under the foundation IRB
approach, APRA does not recognise other
collateral in these circumstances. Under
APRA’s standards, if collateral does not
meet the requirements for eligible financial
collateral, financial receivables or
residential or commercial real estate, the
exposure must be considered unsecured
and assigned a higher loss-given-default
estimate under the foundation IRB
approach.
No participant banks use the Foundation
IRB approach for these portfolios – no
adjustment made for this item.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 44
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
secured by collateral which is not eligible financial
collateral or eligible IRB collateral.
? Exposures where the ratio of C to E exceeds a second,
higher threshold level of C** (i.e. the required level of
over-collateralisation for full LGD recognition) would be
assigned an LGD according to the following table.
The following table displays the applicable LGD and required
over collateralisation levels for the secured parts of senior
exposures:
(Also see paras 521–522)
RCAP
Annex
10.17
n/a
Foundation
IRB - 100%
CCF for
commitments
etc
Basel II para 312:
312. A CCF of 75% will be applied to commitments, NIFs and
RUFs regardless of the maturity of the underlying facility.
This does not apply to those facilities which are uncommitted,
that are unconditionally cancellable, or that effectively
provide for automatic cancellation, for example due to
deterioration in a borrower’s creditworthiness, at any time by
the bank without prior notice. A CCF of 0% will be applied to
these facilities.
(also see paras 366–367 for purchased receivables)
Under the foundation IRB approach, banks
may assign a 75% credit conversion factor
for commitments, note issuance facilities
and revolving underwriting facilities.
APRA has set the standard supervisory
credit conversion factor to 100% for such
exposures.
No participant banks use the Foundation
IRB approach for these portfolios – no
adjustment made for this item.
RCAP
Annex
10.18
n/a
Excess eligible
provisions –
not included in
capital
Basel II para 384–385 (and 43):
384. As specified in paragraph 43, banks using the IRB
approach must compare the total amount of total eligible
provisions (as defined in paragraph 380) with the total EL
amount as calculated within the IRB approach (as defined in
paragraph 375). In addition, paragraph 42 outlines the
treatment for that portion of a bank that is subject to the
standardised approach to credit risk when the bank uses both
the standardised and IRB approaches.
385. Where the calculated EL amount is lower than the
provisions of the bank, its supervisors must consider whether
the EL fully reflects the conditions in the market in which it
operates before allowing the difference to be included in Tier
2 capital. If specific provisions exceed the EL amount on
defaulted assets this assessment also needs to be made before
using the difference to offset the EL amount on non-defaulted
assets.
Banks must compare the total amount of
eligible provisions with a total expected
loss amount. Where the expected loss
amount is less than the provision amount,
Basel says that the difference may be
included in Tier 2 capital subject to
supervisors’ satisfaction that the bank’s
expected loss fully reflects the conditions
in the market. APRA is arguably more
conservative in that prohibits any excess
provision related to defaulted exposures to
be included in Tier 2 capital.
This impacts Total Capital. An impact for
this difference was not calculated for this
study as the focus is on CET1.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 45
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
43. Under the internal ratings-based (IRB) approach, the
treatment of the 1988 Accord to include general provisions (or
general loan-loss reserves) in Tier 2 capital is withdrawn.
Banks using the IRB approach for securitisation exposures or
the PD/LGD approach for equity exposures must first deduct
the EL amounts subject to the corresponding conditions in
paragraphs 563 and 386, respectively. Banks using the IRB
approach for other asset classes must compare (i) the amount
of total eligible provisions, as defined in paragraph 380, with
(ii) the total expected losses amount as calculated within the
IRB approach and defined in paragraph 375. Where the total
expected loss amount exceeds total eligible provisions, banks
must deduct the difference. Deduction must be on the basis of
50% from Tier 1 and 50% from Tier 2. Where the total
expected loss amount is less than total eligible provisions, as
explained in paragraphs 380 to 383, banks may recognise the
difference in Tier 2 capital up to a maximum of 0.6% of credit
risk weighted assets. At national discretion, a limit lower than
0.6% may be applied.
Credit risk: securitisation
RCAP
Annex
10.19
n/a
Securitisation
originating
bank– wider
definition
Basel II para 543:
For risk-based capital purposes, a bank is considered to be an
originator with regard to a certain securitisation if it meets
either of the following conditions:
a) The bank originates directly or indirectly underlying
exposures included in the securitisation; or
b) The bank serves as a sponsor of an asset-backed
commercial paper (ABCP) conduit or similar programme
that acquires exposures from third-party entities. In the
context of such programmes, a bank would generally be
considered a sponsor and, in turn, an originator if it, in
fact or in substance, manages or advises the programme,
places securities into the market, or provides liquidity
and/or credit enhancements.
Basel defines an originating bank as one
that directly or indirectly originates
exposures in the securitisation or one that
sponsors an asset-backed commercial
paper conduit or similar program that
acquires exposures from third-party
entities. APRA’s definition is wider and
includes ADIs that manage non-asset
backed commercial paper structures as the
definition of origination is not dependent
on the structure of the securitisation but
rather on the ADI’s role.
Participant banks estimated that the risk
weighted asset benefit is immaterial should
the narrower BCBS definition of
originating bank be applied.
RCAP
Annex
10.20
Securitisation
implicit
support–
additional
Basel II para 554(f):
An originating bank may exclude securitised exposures from
the calculation of risk weighted assets only if all of the
following conditions have been met. Banks meeting these
Basel defines implicit support (which is
prohibited). APRA goes beyond the Basel
definition and also prohibits an increase in
yield as a result of changes in the credit
rating of the originator.
This difference impacts transaction
structure and documentation, as such any
RWA benefit is not quantifiable.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 46
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
n/a prohibitions conditions must still hold regulatory capital against any
securitisation exposures they retain.
f) The securitisation does not contain clauses that (i)
require the originating bank to alter systematically the
underlying exposures such that the pool’s weighted
average credit quality is improved unless this is achieved
by selling assets to independent and unaffiliated third
parties at market prices; (ii) allow for increases in a
retained first loss position or credit enhancement
provided by the originating bank after the transaction’s
inception; or (iii) increase the yield payable to parties
other than the originating bank, such as investors and
third-party providers of credit enhancements, in response
to a deterioration in the credit quality of the underlying
pool.
Operational risk: Advanced Measurement Approaches
RCAP
Annex
10.21
n/a
Foreign bank
subsidiaries –
additional
conditions
Basel II para 656:
A bank adopting the AMA may, with the approval of its host
supervisors and the support of its home supervisor, use an
allocation mechanism for the purpose of determining the
regulatory capital requirement for internationally active
banking subsidiaries that are not deemed to be significant
relative to the overall banking group but are themselves
subject to this Framework in accordance with Part 1.
Supervisory approval would be conditional on the bank
demonstrating to the satisfaction of the relevant supervisors
that the allocation mechanism for these subsidiaries is
appropriate and can be supported empirically. The board of
directors and senior management of each subsidiary are
responsible for conducting their own assessment of the
subsidiary’s operational risks and controls and ensuring the
subsidiary is adequately capitalised in respect of those risks.
Basel allows foreign bank subsidiaries to
use the parent bank’s allocation
mechanism for the purpose of determining
the regulatory capital requirement for
operational risk at that level if the host
regulator accepts the mechanism. APRA
has set out detailed conditions and criteria
a foreign bank subsidiary must satisfy
before its allocation mechanism is
recognised for regulatory capital purposes.
This includes requirements around
sufficiency of allocated capital, appropriate
risk-sensitivity of the allocation
mechanism, controls on data and
governance and the operational risk
management framework aligning to the
Advanced Measurement Approaches
(AMA) (not simply the allocation
mechanism). APRA also requires that the
home supervisor’s requirements (relating
to the AMA) are sufficiently similar to
those of APRA.
Not applicable - none of the participant
banks are subsidiaries of foreign parent
banks.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 47
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
RCAP
Annex
10.22
n/a
Operational
risk AMA
criteria
Basel II para 664:
664. In order to qualify for use of the AMA a bank must satisfy
its supervisor that, at a minimum:
? Its board of directors and senior management, as
appropriate, are actively involved in the oversight of the
operational risk management framework;
? It has an operational risk management system that is
conceptually sound and is implemented with integrity;
and
? It has sufficient resources in the use of the approach in the
major business lines as well as the control and audit areas.
Basel II includes specific risk management
and governance criteria for use of the
AMA. APRA’s requirements are in some
respects more precise and detailed
including specific requirements relating to
Board and senior management
responsibilities and the operational risk
management function.
This difference is seen procedural in
nature and as such not quantifiable in
RWA or capital terms.
RCAP
Annex
10.23
A9
Operational
risk AMA
quantitative
standards
Basel II para 667–668:
667. Given the continuing evolution of analytical approaches
for operational risk, the Committee is not specifying the
approach or distributional assumptions used to generate the
operational risk measure for regulatory capital purposes.
However, a bank must be able to demonstrate that its
approach captures potentially severe ‘tail’ loss events.
Whatever approach is used, a bank must demonstrate that its
operational risk measure meets a soundness standard
comparable to that of the internal ratings based approach for
credit risk, (i.e. comparable to a one year holding period and a
99.9th percentile confidence interval).
668. The Committee recognises that the AMA soundness
standard provides significant flexibility to banks in the
development of an operational risk measurement and
management system. However, in the development of these
systems, banks must have and maintain rigorous procedures
for operational risk model development and independent
model validation. Prior to implementation, the Committee
will review evolving industry practices regarding credible and
consistent estimates of potential operational losses. It will also
review accumulated data, and the level of capital
requirements estimated by the AMA, and may refine its
proposals if appropriate.
Basel II sets quantitative standards
regarding AMA soundness. APRA explicitly
requires a number of elements regarding
conservatism in modelling choices and
assumptions including comprehensive and
rigorous sensitivity analysis. These
requirements are also applied to changes
to the operational risk measurement
system. APRA also requires ADIs to
consider and document evolving industry
practices in assessing its own practices.
Participant banks were asked to quantify
the impact of not applying the APRA
conservatism in modelling assumptions.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 48
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
RCAP
Annex
10.24
A9
Operational
Risk - fraud
related losses
Basel II para 673:
To qualify for regulatory capital purposes, a bank’s internal
loss collection processes must meet the following standards:
? To assist in supervisory validation, a bank must be able to
map its historical internal loss data into the relevant level
1 supervisory categories defined in Annexes 8 and 9 and to
provide these data to supervisors upon request. It must
have documented, objective criteria for allocating losses to
the specified business lines and event types. However, it is
left to the bank to decide the extent to which it applies
these categorisations in its internal operational risk
measurement system.
? A bank’s internal loss data must be comprehensive in that
it captures all material activities and exposures from all
appropriate sub-systems and geographic locations. A bank
must be able to justify that any excluded activities or
exposures, both individually and in combination, would
not have a material impact on the overall risk estimates. A
bank must have an appropriate de minimis gross loss
threshold for internal loss data collection, for example
€10,000. The appropriate threshold may vary somewhat
between banks, and within a bank across business lines
and/or event types. However, particular thresholds should
be broadly consistent with those used by peer banks.
? Aside from information on gross loss amounts, a bank
should collect information about the date of the event, any
recoveries of gross loss amounts, as well as some
descriptive information about the drivers or causes of the
loss event. The level of detail of any descriptive
information should be commensurate with the size of the
gross loss amount.
? A bank must develop specific criteria for assigning loss
data arising from an event in a centralised function (e.g.
an information technology department) or an activity that
spans more than one business line, as well as from related
events over time.
? Operational risk losses that are related to credit risk and
have historically been included in banks’ credit risk
databases (e.g. collateral management failures) will
Basel provides guidance on operational
risk losses that are related to credit risk. In
addition to the Basel guidance, APRA
requires fraud perpetrated by parties other
than the borrower to be treated as
operational risk (rather than credit-
related) for the purpose of determining
regulatory capital.
Participant banks were asked to quantify
the impact of not applying the APRA
requirement of allocating fraud
perpetrated by parties other than
borrowers of the bank.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 49
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
continue to be treated as credit risk for the purposes of
calculating minimum regulatory capital under this
Framework. Therefore, such losses will not be subject to
the operational risk capital charge.109 Nevertheless, for
the purposes of internal operational risk management,
banks must identify all material operational risk losses
consistent with the scope of the definition of operational
risk (as set out in paragraph 644 and the loss event types
outlined in Annex 9), including those related to credit risk.
Such material operational risk-related credit risk losses
should be flagged separately within a bank’s internal
operational risk database. The materiality of these losses
may vary between banks, and within a bank across
business lines and/or event types. Materiality thresholds
should be broadly consistent with those used by peer
banks.
? Operational risk losses that are related to market risk are
treated as operational risk for the purposes of calculating
minimum regulatory capital under this Framework and
will therefore be subject to the operational risk capital
charge.
Counterparty credit risk
RCAP
Annex
10.25
A10
Counterparty
Credit Risk -
EAD > 0
Basel II Annex 4 para 7–8:
7. Under all of the three methods identified in this Annex,
when a bank purchases credit derivative protection against a
banking book exposure, or against a counterparty credit risk
exposure, it will determine its capital requirement for the
hedged exposure subject to the criteria and general rules for
the recognition of credit derivatives, i.e. substitution or double
default rules as appropriate. Where these rules apply, the
exposure amount or EAD for counterparty credit risk from
such instruments is zero.
8. The exposure amount or EAD for counterparty credit risk is
zero for sold credit default swaps in the banking book where
they are treated in the framework as a guarantee provided by
the bank and subject to a credit risk charge for the full
notional amount.
Basel sets the exposure at default estimate
for counterparty credit risk for credit
derivative protection at zero. APRA
imposes a more stringent requirement as
the exposure at default amount for such
exposures is not set at zero.
Participant banks were asked to quantify
the risk weighted asset impact of changing
the EAD for credit derivative protection at
zero.
Extracts of rules pertaining to differences
Australian Bankers' Association
PwC 50
RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
Market risk
RCAP
Annex
10.26
n/a
Correlation
trading
portfolio
Revisions to the Basel II market risk framework
(updated December 2010):
Paragraph 709(ii) of the Basel II Framework will be changed
as follows, and a new paragraph 709(ii-1-) will be introduced.
Changed and new wording is underlined.
709(ii). The minimum capital requirement is expressed in
terms of two separately calculated charges, one applying to
the “specific risk” of each security, whether it is a short or a
long position, and the other to the interest rate risk in the
portfolio (termed “general market risk”) where long and short
positions in different securities or instruments can be offset.
The bank must, however, determine the specific risk capital
charge for the correlation trading portfolio as follows: The
bank computes (i) the total specific risk capital charges that
would apply just to the net long positions from the net long
correlation trading exposures combined, and (ii) the total
specific risk capital charges that would apply just to the net
short positions from the net short correlation trading
exposures combined. The larger of these total amounts is then
the specific risk capital charge for the correlation trading
portfolio.
Given that managing a correlation trading
portfolio introduces additional complexity
and risk, ADIs must seek APRA’s approval
in order to use the more favourable capital
treatment.
Participant banks were asked to quantify
the impact of applying more favourable
BCBS treatment for correlation trading
portfolios. Participants determined the
impact was not material.
Pillar 2
RCAP
Annex
10.27
A11
IRRBB - Pillar
1 inclusion
Basel II para 763–764:
763. The revised guidance on interest rate risk recognises
banks’ internal systems as the principal tool for the
measurement of interest rate risk in the banking book and the
supervisory response. To facilitate supervisors’ monitoring of
interest rate risk exposures across institutions, banks would
have to provide the results of their internal measurement
systems, expressed in terms of economic value relative to
capital, using a standardised interest rate shock.
764. If supervisors determine that banks are not holding
capital commensurate with the level of interest rate risk, they
must require the bank to reduce its risk, to hold a specific
additional amount of capital or some combination of the two.
Supervisors should be particularly attentive to the sufficiency
Basel includes interest rate risk in the
banking book (IRRBB) as a Pillar 2
consideration. APRA requires a mandatory
Pillar 1 capital charge for IRRBB for those
ADIs using the IRB approach to credit risk
and the AMA for operational risk.
The current Pillar 1 IRRBB risk weighted
asset was reduced to zero.
Extracts of rules pertaining to differences
Australian Bankers' Association
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RCAP
/ PwC
Refs. Description Basel Ref. APRA v BCBS difference Approach taken in this study
of capital of ‘outlier banks’ where economic value declines by
more than 20% of the sum of Tier 1 and Tier 2 capital as a
result of a standardised interest rate shock (200 basis points)
or its equivalent, as described in the supporting document
Principles for the Management and Supervision of Interest
Rate Risk.
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Appendix G Names of Australian banks and jurisdictional
peers used in this analysis
Australian major banks
No. Bank full name Abbreviation
1 Australia and New Zealand Banking Group ANZ
2 Commonwealth Bank of Australia CBA
3 National Australia Bank Ltd. NAB
4 Westpac Banking Corporation WBC
Jurisdictional peers in Canada, Singapore, UK, Japan, Switzerland and Germany
No. Jurisdiction Bank full name Abbreviation
1 Canada Royal Bank Canada RBC
2 Canada Toronto-Dominion Bank TD
3 Canada The Bank of Nova Scotia BNS
4 Canada Bank of Montreal BMO
5 Canada Canadian Imperial Bank of Commerce CIBC
6 Singapore DBS Group Holdings Ltd DBS
7 Singapore Oversea-Chinese Banking Corporation Limited OCBC
8 UK HSBC Holdings PLC HSBC
9 UK Barclays PLC BARC
10 UK Royal Bank of Scotland Group PLC RBS
11 UK Lloyds Banking Group PLC LLOY
12 UK Standard Chartered Bank SCB
13 Japan Mitsubishi UFJ Financial Group Inc. MUFG
14 Japan Sumitomo Mitsui Trust Holdings Inc. SMTH
15 Switzerland Credit Suisse Group AG Credit Suisse
16 Switzerland UBS Group AG UBS
17 Germany Deutsche Bank AG DBK
18 Germany Commerzbank AG CBK
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Appendix H Glossary
ABA Australian Bankers' Association
ABCP Asset-backed commercial paper
ADC Acquisition, development and construction
ADI Authorised deposit-taking institution
Advanced banks Banks which have been accredited to use their own models for calculating risk weighted assets
AIRB (or Advanced IRB) Advanced internal ratings-based approach
AMA Advanced measurement approaches
APRA Australian Prudential Regulation Authority
Basel Framework Basel Framework includes Basel II, Basel 2.5 and Basel III and refers a number of documents. Refer to the BCBS’ Regulatory Consistency
Assessment Programme (RCAP), Assessment of Basel III regulations – Canada June 2014, Annex 3: List of capital standards under the
Basel Framework used for assessment.
BCBS Basel Committee on Banking Supervision
BIS Bank for International Settlements
CAR Canadian Capital Adequacy Requirements
CCF Credit conversion factor
CET1 Common Equity Tier 1
CET1 (APRA) Measurement using applicable Australian rules
CET1 (Basel Framework) Measurement using Basel Framework rules
CET1 (Canadian) Australian and Canadian banks on a CET1 (Canadian) basis
CET1 (German) Australian and German banks on a CET1 (German) basis
CET1 (Japanese) Australian and Japanese banks on a CET1 (Japanese) basis
CET1 (Singaporean) Australian and Singaporean banks on a CET1 (Singaporean) basis
CET1 (Swiss) Australian and Swiss banks on a CET1 (Swiss) basis
CET1 (UK) Australian and UK banks on a CET1 (UK) basis
CRR Capital Requirements Regulation
D-SIB Domestic systemically important bank
DTAs Deferred tax assets
EAD Exposure at default
EL Expected loss
FIRB (or Foundation IRB) Foundation internal ratings-based approach
Glossary
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FSI Financial System Inquiry
G-SIB Global systemically important bank
HVCRE High-volatility commercial real estate
Internationally comparable CET1 Measurement using Basel Framework rules and allowing for national regulatory treatments which would impact on how those rules are
implemented in that jurisdiction by comparison to international norms
IRB Internal Ratings-Based
IRRBB Interest rate risk in the banking book
LGD Loss-given-default
LVR Loan to value ratio
MSR Mortgage servicing rights
NIF Note issuance facility
OSFI Office of the Superintendent of Financial Institutions
PD Probability of default
PSE Public sector entity
QRRE Qualifying revolving retail exposures
RCAP Regulatory Consistency Assessment Programme
RUF Revolving underwriting facility
RWA Risk weighted assets
SL Specialised lending
SME Small- and medium-sized entity
UCITS Undertakings for collective investments in transferable securities
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