Banking Group has emerged as having the highest level of on-balance sheet credit exposure of any major Australian bank, as the sector prepares for a tougher credit cycle.

ANZ and Macquarie Group on Wednesday reported their credit disclosures to September 30 under internationally accepted reporting standards - Pillar 3 of Basel II.

Basel II is the capital adequacy framework for Australian deposit-taking institutions (ADIs) that adopt more advanced risk management approaches.

ANZ’s submission to the Australian Prudential Regulation Authority (APRA) showed total credit exposures weighed in at $537.6 billion, $4.4 billion more than Commonwealth Bank of Australia (CBA).

Macquarie Group’s credit exposures stand at $40.5 billion, the group told APRA.

ANZ’s was the final retail bank to report its exposures. These directly affect each bank’s mortgage book and other risk-weighted assets.

APRA requires ADIs to hold a set ratio, called tier 1, of capital to their risk-weighted assets to ensure their capital levels are sufficient to absorb unanticipated losses and provide a capital buffer.

The ADIs are subject to a prudential capital ratio of eight per cent of total risk weighted assets, half of which - four per cent - must be held in tier 1 capital.

The major banks will move to complete their full Basel II accreditation in coming months.

At the end of September, the tier 1 ratios of the major ADIs were 7.35 per cent for National Australia Bank, 7.54 per cent for CBA, 7.7 per cent for ANZ, 7.8 per cent for Westpac and 11 per cent for Macquarie.

As the benign credit environment of the past six years subsides, there will be pressure on that ratio as the financial environment deteriorates with rising corporate exposures and loan impairments.

On Citigroup numbers, this could lead to a drop in the tier 1 ratio of between 76 basis points and 179 basis points per bank by 2011 since each one per cent growth in risk-weighted assets creates an eight basis point drain on tier 1 capital.

Australia’s big four banks and their lobby group, the Australian Bankers Association (ABA), have been at pains to point out that the rules for the local implementation of Basel II set by APRA distort international comparisons made between local banks and their offshore competitors on capital levels.

They claim international investors should note their tier 1 ratios under the UK Financial Services Authority’s rules for Basel II implementation, which add two per cent, on average, to each of the big four’s ratios.

But APRA maintains it has tailored its approach for Australian institutions, reflecting the different composition of their loan books.

AAP