APRA’s announcement process

As you can read from the post below, the approvals for various banks to use some of the advanced approaches for Basel II compliance have been released. An interesting point that arises from it is the approach to the announcement.

With about 20 days to go, the banks were simply told this morning whether they were going Advanced or not and what they were allowed to do. It included a couple of real surprises – not about which banks, but a whole approach.

APRA have been consistent from their first letter on Basel II (23/6/2003) that “…AMA will not be available to non-IRB banks.” Yet their announcement this morning gives AMA to two banks not going IRB – NAB and BankWest. Better yet, these ones are not even going Basel II Standardised yet – they are staying Basel I for credit risk.

Of course, that leaves a very big question for these two – what will our capital requirement be next year? Basel I implicitly included the capital for operational risk within the credit risk component. Basel II explicitly splits these – meaning the banks going Basel I plus AMA are having their operational risk capital double counted. APRA will need to clear this one up – and fast. For Australia’s biggest bank (never mind BankWest) this is only a slightly important question.

Macquarie’s announcement to the exchange this morning was very interesting, claiming to get the “advanced approaches”. Note the (presumably very careful) omission of the capital “A” on advanced. This is because they have gone “Foundation” not “Advanced” for credit risk. To me, this comes close to “misleading and deceptive conduct” – but probably not quite there.

Likely attitudes to the announcement:

• ANZ – happy and able to crow about excellence in the usual things that banks like to crow about;
• BankWest – wondering what APRA was thinking about to come up with this approach;
• CBA – happy and able to crow about excellence in the usual things that banks like to crow about;
• Macquarie – reasonably content (and quite smug on the wording of their press release);
• NAB – wondering about how to calculate their capital requirement for next year and how the market will digest this over the next few days (and how to phrase their press release – not out yet);
• St. George – feeling a bit sore but confident they can fix it; and
• Westpac – happy and able to crow about excellence in the usual things that banks like to crow about.

All in all, an