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APRA increases loss-absorbing capacity requirements

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The regulator has announced its plan to increase the loss-absorbing capacity requirements for ADIs by requiring banks to lift total capital by 3 percentage points by 2024. 

Last year, APRA proposed that the four major Australian banks would be required to increase their total capital by 4 to 5 percentage points of risk weighted assets (RWA) over four years. 

Following an extensive engagement, APRA has announced that it will require the major banks to lift total capital by 3 percentage points of RWA by 2024. 

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The regulator expected banks to meet the bulk of this requirement by raising additional tier 2 capital while small and medium-sized ADIs’ capacity for loss-absorption would be considered on a case-by-base basis.

The proposal was amended due to concerns raised about a lack of market capacity to absorb an extra 4 to 5 per cent of RWA in tier 2 issuance and the potential to excessively increase bank funding costs. 

Following consultation, APRA said it was confident that the issuance of an additional 3 percent of RWA in tier 2 instruments can be achieved and maintained. 

The long-term target of an additional 4 to 5 percentage points of loss-absorbing capacity remains unchanged, with APRA to consider the most feasible method of sourcing the remaining percentage points. 

These changes would increase the resources available to APRA to safely resolve an ADI and minimise the need for taxpayer support in the event of a failure. 

Deputy chair John Lonsdale said the measures were an important step in minimising the risks to depositors. 

“The global financial crisis highlighted examples overseas where taxpayers had to bail out large banks due to a lack of residual financial capacity. 

“Boosting loss-absorbing capacity enhances the safety of the financial system by increasing the financial resources that an ADI holds for the purpose of orderly resolution and the stabilisation of critical functions in the unlikely event that it fails,” he said. 

Mr Lonsdale said the proposal may increase funding costs for tier 2 instruments, but overall funding costs increases would continue to remain small. 

“Having taken into account feedback on market capacity, increasing total capital requirements by 3 percentage points by 2024 (instead of the 4 to 5 originally proposed) will be easier for the market to absorb and reduce the risk of unintended market consequences,” he said. 

The estimated increase in overall funding costs was estimated to be less than 5 basis points, which APRA said was well within the range of analysis conducted by the RBA. 

“By lifting their total capital by 3 percentage points of risk-weighted assets, we estimate the major banks will cumulatively strengthen their loss-absorbing capacity by $50 billion,” said Mr Lonsdale. 

The majors have already begun to respond with both NAB and ANZ announcing that the proposal would mean a total capital increase requirement of roughly $12 billion, based on last year’s RWA.

NAB said it would meet the new requirement primarily through the issuance of tier 2 capital with a corresponding decrease in senior debt issuance. 

Westpac said that based on its $420 billion RWA as of March 2019, it would mean an additional capital of $13 billion with an increase in capital alongside a corresponding decrease in other funding forms. 

This was similiar to CBA which said its RWA of $447bn represented an incremental increase of $13bn in total capital but the ultimate cost was not yet known. 

 

APRA increases loss-absorbing capacity requirements
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Eliot Hastie

Eliot Hastie

Eliot Hastie is a journalist at Momentum Media, writing primarily for its wealth and financial services platforms. 

Eliot joined the team in 2018 having previously written on Real Estate Business with Momentum Media as well.

Eliot graduated from the University of Westminster, UK with a Bachelor of Arts (Journalism).

You can email him on: [email protected]

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