FITCH: Australian Bank Capital Ratios Understate True Position

Australian banks' capital positions have been strengthening, but the extent of improvement and the regulatory capital ratios themselves are understated relative to many international peers due to a conservative implementation of the Basel capital framework, says Fitch Ratings in the agency's latest Asia-Pacific Banks Chart of the Month report.

The conservative implementation makes it difficult to compare capital across jurisdictions, which is unlikely to change after adjustments to global rules are finalised later in 2016.

The banks have estimated 'internationally comparable' regulatory capital ratios, but Fitch says these fail to encompass all the conservative elements, so truly comparable ratios are likely to sit somewhere between the internationally comparable and the domestic regulatory calculations.

The differences arise in part because the Australian regulator uses Pillar I charges for many factors - including interest-rate risk in the banking book - that other jurisdictions capture in Pillar II. Another key difference is a 20% loss given default floor for internal ratings-based residential mortgages, resulting in a higher average Pillar I risk weight. New regulatory rules will increase the floor to at least 25% from 1 July 2016, further distorting international comparisons.