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Moody's Investors Service says that Australia's banks are well positioned to meet the accelerated schedule proposed by the Australian Prudential Regulation Authority (APRA) for meeting Basel III capital standards 2-3 years earlier than the official Basel timetable.

APRA intends to relax some of the conservative overlays which it has imposed with regards to capital ratio calculation, but it is also adding some additional overlays in its Basel III implementation, and which will offset this relaxation.

"On balance, we expect these changes to make it a little easier for the banks to meet the earlier deadlines, and they will also narrow the degree to which Australian banks will report capital ratios lower than if calculated using a more 'plain vanilla' Basel III approach. But it is clear that APRA's capital requirements will remain considerably more conservative than what Basel III prescribes," says Patrick Winsbury, a Moody's Senior Vice President.

APRA will require banks to hold minimum Common Equity Tier 1 of 4.5% by 1 January 2013, two years ahead of schedule. APRA may set a higher requirement on a case by case basis. Banks will also be required to hold a Capital Conservation Buffer of up to 2.5% by 2016, three years ahead of schedule. APRA will not allow any phase-in period.

Winsbury was commenting in a Moody's special comment on APRA's release of a discussion paper containing its latest proposals on Basel III. Moody's rates a total of 15 banks in Australia -- including the big four -- with their bank financial strength ratings averaging B-.

The special comment notes that APRA's discussion paper does not address the key issue of whether the country's major banks will be considered 'Systemically Important Banks (SIBs)' and attract an additional capital requirement, but notes that Australia's existing capital regime already explicitly considers systemic importance.

The paper also does not address Basel III liquidity requirements, which are structurally more challenging for the banks to meet than the capital requirements.

"Overall, we view the impact of APRA's proposals to be supportive of the stand-alone ratings of Australian banks. The banks have the capital strength, earnings and operational flexibility to meet the earlier deadlines, which will further solidify their ability to weather unforeseen shocks," says Winsbury.

Moody's believes there is an important signaling benefit to early Basel III adoption. The country's major banks are large borrowers in offshore wholesale markets: demonstrating capital strength can only support their access to funding in volatile markets.

"Furthermore, with strong franchises and a relatively stable operating environment -- which allows Australian banks to generate solid risk-adjusted earnings -- the additional capital impost is less likely to drive additional risk-taking than may be the case elsewhere," says Winsbury.

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