The update of Prudential Standard APS 222 Associations (APS 222) aims to further reduce the risk of overseas markets having a detrimental impact spreading to Australian authorised deposit-taking institutions (ADIs).
Under the new rules, APRA has reduced its limit on Australian banks’ exposure to related entities, decreasing it from 50 per cent of Level 1 Total capital to 25 per cent.
ANZ told shareholders yesterday morning as a result of the update, it will have limited capacity to inject capital into its New Zealand business.
The group’s New Zealand subsidiary may be required to retain a higher proportion of its earnings to meet any potential increased capital requirements. Future capital required in New Zealand may also need to be held at a group level.
The final impact on ANZ remains dependent on the outcome of APRA’s and the Reserve Bank of New Zealand’s (RBNZ) consultations on required capital, as well as the size and composition of ANZ’s balance sheet.
The new APS 222 will come into effect from 1 January 2021, but APRA has indicated they are open to providing entity-specific transitional arrangements or flexibility on a case-by-case basis.
ANZ said it expects it could have flexibility with the implementation timeframe and the circumstances under which an exception may be available, such as periods of funding market disruption.
The new standard could affect around 100 operations.
APRA has removed the eligibility of overseas subsidiaries managed and funded within domestic banks to be regulated by the prudential watchdog’s extended licensed entity framework.
Additionally, APRA will now require ADIs to regularly assess and report on their exposure to step-in risk – the likelihood that they may need to “step in” to support an entity to which they are not directly related to.
The changes also include a broader definition of related entities that includes board directors and substantial shareholders and minimum requirements for ADIs to assess contagion risk.
APRA deputy chair John Lonsdale said concessions in the existing framework has led to some ADIs establishing operations in foreign jurisdictions, but both APRA and foreign regulators only have limited visibility of the subsidiaries.
“They complicate operating structures and there is no certainty their assets would be available to an ADI if it were to enter resolution. There are currently around 100 such operations within a small number of ADIs,” Mr Lonsdale said.
“Additionally, if an ADI were to fully utilise some of the limits within the existing framework, they would be exposed to excessive levels of contagion risk.”
Mr Lonsdale said the stronger prudential standard will enhance the prudential safety of ADIs and reinforce financial system stability.
“As we saw during the global financial crisis, deficiencies in governance or internal controls in one part of a corporate group can quickly spread and cause financial or reputational damage to an ADI quickly and protect depositors’ savings in the unlikely event of a bank failure,” Mr Lonsdale said.
“By updating and strengthening the requirements of APS 222, APRA will ensure ADIs are better able to monitor, manage and control contagion risk within their organisations.”
The regulator began consulting last July on the proposed changes.
On Monday, ANZ completed the sale of its 55 per cent stake in Cambodian joint venture ANZ Royal Bank to Japanese financial holding company J Trust.
The deal was said to be in line with ANZ’s strategy to simplify its business and operate wholly owned institutional businesses in the region. The institutional bank now has a presence across 14 different markets in Asia.
The New Zealand bank ANZ’s is the only related entity large enough to be impacted by APRA’s new standard.
