Fitch: Policy Outlook Positive for Aussie Bank Credit Profiles 

The Australian Prudential Regulation Authority's (APRA) prudential policy outlook for 2016 reinforces Fitch Ratings' view that regulatory developments over the next two to three years will strengthen the Australian banking system.

The outlook, which was released on 17 March and is driven largely by the recommendation of the 2014 Financial System Inquiry (FSI), is broadly aligned with our expectations. We continue to believe capital requirements for Australian banks will be raised, although the increase is likely to be gradual. This should enable banks to meet the new requirements through internal capital generation. APRA indicated that it will await the outcome of global changes to the Basel capital framework before finalising its approach to the FSI's recommendation that capital levels be "unquestionably strong". Consultation on this component now appears unlikely before 2017.

We think that APRA's broader interpretation of "unquestionably strong", which includes other areas such as funding and liquidity, will be important in further strengthening the resilience of the system and addressing one of its key weaknesses - a reliance on offshore wholesale funding markets. This is initially likely to be addressed through Basel liquidity ratios - the liquidity coverage ratio, which is already in effect, and the net stable funding ratio on which APRA expects to begin consultation shortly - although we expect the regulator to look at the broader funding mix in the medium to long term.

The outlook continues to support our view that the implementation of a strengthened resolution framework in Australia will occur only gradually - it indicates a medium-term timetable for addressing loss-absorption capacity. We expect Australia, as a G20 member, to ultimately adopt the global framework. We will address the impact on Support Ratings and Support Rating Floors of the Australian banks once we have greater clarity on the timetable.

Other areas addressed by the outlook included the leverage ratio, which APRA has indicated will be implemented along the Basel timeframe, and revisions to the prudential framework for securitisation, which the regulator expects to finalise in 2016.