TAILIEUCHUNG - Bank Capital Adequacy in Australia Byung Kyoon Jang and Niamh Sheridan

A necessary caveat is that we consider a specific LSM, comparing it to a specific model of internal queues. Other LSMs, perhaps associated with different settlement rules, may yield different outcomes. For example, one could think of a system where all payments (even those sent to the RTGS stream) are first passed through the LSM. Then, if LSM settlement does not happen instantly because a cycle has not formed, the urgent RTGS payments are immediately settled by transferring liquidity. This is another way of interacting between the LSM and RTGS streams – one of the many possible ones not considered. | WP 12 25 Bank Capital Adequacy in Australia Byung Kyoon Jang and Niamh Sheridan INTERNATIONAL MONETARY FUND International Monetary Fund WP 12 25 IMF Working Paper Asia and Pacific Department Bank Capital Adequacy in Australia Prepared by Byung Kyoon Jang and Niamh Sheridan1 Authorized for distribution by Ray Brooks January 2012 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author s and are published to elicit comments and to further debate. The paper finds that given Australia s conservative approach in implementing the Basel II framework Australian banks headline capital ratios underestimate their capital strengths. Given their high capital quality and the progress in their funding profiles since the global financial crisis the Australian banks are making good progress toward meeting the Basel III requirements including the new liquidity standards. Stress tests calibrated on the Irish crisis experience show that the banks could withstand sizable shocks to their exposure to residential mortgages. However combining residential mortgage shocks with corporate losses expected at the peak of the global financial crisis would put more pressure on Australian banks capital. Therefore it would be useful to consider the merits of higher capital requirements for systemically important domestic banks. JEL Classification Numbers G20 G21 G28 F32 Keywords Australia Canada Basel II Basel III capital loss given default probability of default stress tests Author s E-Mail Address bjang@ nsheridan@ 1 The authors would like to thank the Reserve Bank of Australia the Australian Prudential Regulation Authority and the Australian Treasury for their valuable comments on earlier drafts of this paper. We benefited greatly from comments and suggestions .

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