In February this year, the Australian Prudential Regulation Authority proposed a minimum leverage ratio within the authorised deposit-taking institutions prudential framework.
The ratio, which measures the proportion of an ADI’s assets that is funded through equity rather than debt is designed to supplement risk-based capital requirements by providing stakeholders with an alternative perspective.
The submissions received by APRA mostly support the introduction of a minimum leverage ratio but raised concerns about the minimum requirement and calculation methodology.
In response to concerns raised APRA has set the minimum requirement for ADIs using the internal ratings-based approach to determine capital adequacy at 3.5 per cent, rather than four per cent.
APRA has set it will keep the leverage ratio for standardised ADIs at three per cent and allow standardised ADIs to use Australian accounting standards rather than Basel III methodology.
However, the Basel III methodology will be required by IRB ADIs to calculate their leverage ratios.
Small ADIs that qualify for the simplified prudential framework will be exempt from the leverage ratio requirements but under the new standards will be required to report to APRA.
Although consultation is still happening, APRA expects the eligibility threshold for that framework to be $15 billion in total assets, which will be complemented by other qualitative measures.
The new standard to assess the leverage ratio is currently undergoing industry consultation with submissions due by February 2019.
