The National Australia Bank Ltd. (ASX: NAB) share price is going gangbusters today following APRA's announcement on bank capital requirements.
NAB Share Price
At the time of writing, the NAB share price is up 3%. Well ahead of the market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), which is up 0.5%.
The catalyst behind the share price increase was the announcement from Australia's banking regulator, APRA, which finally released its new capital framework.
Basically, APRA was due to release new reforms that set tough capital standards for Australian banks.
Banks — and shareholders — were worried that the rules would force them to raise capital by selling shares or cutting dividends.
However, from 2020, the banks will need to maintain at least a 10.5% CET1 capital ratio.
To put the number in perspective, NAB had a CET1 capital ratio of 10.1% at March 31, 2017. In other words, it was not that far away from the new requirement – due in three years.
That's plenty of time for the bank to accumulate more capital.
However, what was equally pleasing for bank shareholders was APRA's comment regarding the current international banking reforms which could influence its decision. It said that any changes made at the international level will be factored into the new requirements between here and 2021.
Foolish Takeaway
The banks must be "unquestionably strong" in the eyes of the regulator. And now we have worked out that APRA believes "strong" equals "a 10.5% CET1 capital ratio". Pleasingly, that's not much higher than NAB's current capital buffer. Meaning cuts to dividends and capital raisings are perhaps unlikely anytime soon.
