EVOLUTION OF BANKING

New Bar for Banking
Basel III raises bar for Australian banks
The Global Financial Crisis brought into question the loss provisions of many international banks,
prompting the development of Basel III, a new voluntary regulatory standard for bank capital adequacy.
It’s a key issue here also in Australia with the Murray financial system inquiry flagging the possible risks
of any future crises on Australian lenders.
Basel III is issued by the Basel Committee on Banking Supervision (Basel Committee) and endorsed
prior to release by the Group of 20 (G20). Australia is a member of both the Basel Committee and the
G20 and has adopted these to support the resilience of the Australian banking system as the foundation
for sustainable economic growth.
Although not at the epicentre of the GFC crisis, Australia was not immune from the severe contraction
in global liquidity, cross-border credit availability and demand for exports in spite of its strong pre-crisis
economy, powerful and timely fiscal and monetary policy actions, and the strong prudential supervisory
framework of APRA.
Some of the fundamental factors that contributed to the global financial crisis overseas – insufficient
regulatory capital and poor quality loss absorption of the capital base – were direct results of
weaknesses in the existing global regulatory framework, Basel II. Given the impact of financial crises
and the global nature of the financial system, Australia, as did many countries, adopted Basel III to raise
the resilience of their banking sectors to both internal and external shocks which has contributed to the
maintenance of the high regard for Australia’s banking system internationally.
Adoption of the Basel III capital reforms is central to the resilience of its system. The underlying
principle that regulatory capital is determined by reference to the risks ADIs face and the assets they
hold remain the same. However, Basel III introduces more stringent criteria for inclusion in regulatory
capital and by requiring higher minimum levels of that capital to be held against risk.
Basel III also includes measures to:
• improve the risk coverage of the Basel II framework by strengthening the capital requirements for
counterparty credit risk exposures arising from derivatives, repurchase transactions and securities
financing activities;
• introduce a leverage ratio as a supplementary measure to the risk-based Basel II framework to help
contain the build-up of excessive leverage in the banking system and safeguard against model risk
and measurement error; and
• introduce a series of measures to promote the build-up of capital buffers in good times that can be
drawn upon in periods of stress.
Compliance costs of Basel III include changes to current systems and processes. Added to the Murray
Inquiry outcomes, the next few years will challenge the resourcefulness and the resilience of Australian
banks and other financial institutions.
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