Here’s a look at what the new capital requirements mean for Aussie banks…
The post Here’s why ASX 200 banks are making news today appeared first on The Motley Fool Australia. –
The S&P/ASX 200 Index (ASX: XJO) has managed to pull itself out of the red on Thursday afternoon. A big contributor to today’s turnaround has been the gains in ASX 200 bank shares.
Interestingly, the positive sentiment towards banks comes amid new capital requirements instated by The Australian Prudential Regulation Authority (APRA).
Today, ASX-listed banking behemoths such as the Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) have managed to shake off any worries of what these new requirements could mean. At present, these two bank shares are trading 2.07% and 1.06% higher respectively.
Let’s dig into the details of what APRA’s latest buffer requirements actually are.
APRA putting the prudent in prudential
In Australia, we are fortunate enough to have a relatively stable economy. While COVID-19 chucked a spanner in the works, prudent banking policy helped negate a collapse in our financial system.
The regulatory body responsible for keeping the banks and other financial institutions in check is APRA, which was established in 1998. Essentially, the independent authority works to protect depositors, policyholders, and superannuation fund members. In doing this, confidence in the local financial system is perpetuated — allowing the gears to keep on turning.
Today, APRA informed the public that it has begun working on new prudential standards. Importantly, these standards are hoped to strengthen the preparedness of ASX 200 banks in the event of a financial crisis. The new standards are known as CPS 190 and CPS 900.
In discussing the proposed new standards, APRA deputy chair John Lonsdale said:
Although Australia has one of the strongest and most stable financial systems in the world, and failures are extremely rare, businesses in any competitive market can face financial difficulties. Should that happen, we want to be sure each entity has the capability to either recover or manage an orderly exit with the smallest possible impact on the community and the financial system.
In short, the standards will ensure APRA-regulated entities have a plan in place for a financial crisis. Secondly, it will require big banks to take pre-emptive measures so that in the event of failure, APRA can pick up the pieces with minimal damage to the financial system.
What other APRA changes are there for ASX 200 banks?
Another important change that is sure to be discussed in ASX 200 bank boardrooms this week is APRA’s finalised loss-absorbing capacity requirements. In simple terms, this is how much spare capital banks are required to have to protect depositors from any fallout.
APRA has decided to increase the minimum total capital requirement to 4.5% of risk-weighted assets. As a result, including other buffers, a typical major bank will need an 18.25% capital buffer. For context, this was previously 13% under the previous requirements.
However, financial institutions — such as ASX 200 banks — will have until 1 January 2026 to reach the new requirement.
So far, both NAB and Australia and New Zealand Banking Group Ltd (ASX: ANZ) have suggested they will be able to meet the new requirements.
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Motley Fool contributor Mitchell Lawler owns shares of Commonwealth Bank of Australia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.