CIFR-funded Macquarie University researcher Dr James Cummings said the structure of the risk-based capital requirements could have been a concern, not only for the banks but also for the Reserve Bank of Australia (RBA).
Dr Cummings said the requirements become more stringent during periods when economic activity is subdued and banks are experiencing more losses.
“Efforts by the RBA to stimulate the economy by lowering interest rates simply wouldn’t work if banks were to refrain from lending because they were hamstrung by regulatory capital requirements,” he said.
Dr Cummings said the research revealed, however, that a mechanism in place for banks to manage these risks, the loan-loss provisioning model mandated by APRA in 2006, is “responsive to both the problem loans and the intrinsic quality of banks’ loan portfolios”.
“It also encourages banks to pre-fund future credit losses using surplus capital and earnings in periods when these indicators are stronger,” he said.
Setting aside this surplus to use as a reserve when credit conditions deteriorate, Mr Cummings said, will be “critical to the success of Australian banks in coping with the new capital adequacy requirements under Basel III.
“It will also help ensure the RBA’s monetary policy endeavours remain effective,” he said.
