APRA has launched a review into the capital treatment of the major banks’ investments in their banking and insurance subsidiaries, following higher capital requirements being placed on Kiwi banks.
In a consultation paper released yesterday, the regulator proposed updating its relevant prudential standard, aiming to ensure the appropriate capital treatment is applied to investments in subsidiaries.
APRA said its approach was in part shaped by the Reserve Bank of New Zealand’s (RBNZ) proposal for its country’s banks to materially lift their regulatory capital. The Australian regulator is in discussions with the central bank.
The RBNZ has also proposed a five-year transition period will apply for any change in requirements.
Australia’s major banks would be impacted, with the big four owning New Zealand’s four largest banks.
To protect Australian deposit holders where the majors hold significant investments in subsidiaries, APRA has proposed for an increased amount of equity required to support investments in large affiliates and a reduced amount for small subsidiaries.
In particular the watchdog is proposing that equity investments in subsidiaries will be risk weighted at 250 per cent, up to a limit of 10 per cent of Level 1 Common Equity Tier 1 (CET1) capital and equity investments in excess of the 10 per cent limit will be fully deducted from Level 1 CET1 capital in determining Level 1 capital ratios.
Equity investments in banking and insurance subsidiaries are currently risk weighted at 400 per cent at Level 1.
The prudential regulator said it seeks to balance the benefits of revenue diversification for the banks against the potential concentration risk that arises as the investments grow in size.
APRA has estimated that no additional capital will be required at an aggregate industry level, however individual ADIs may need to either raise capital or gain a capital benefit.
APRA deputy chair John Lonsdale said the proposed measures seek to support the resilience of the major banks’ operations in Australia.
“An ADI’s capital base is the cornerstone of its financial soundness and ability to meet its obligations to deposit-holders,” he said.
“In relation to New Zealand, there are a number of options available to the banks. If they decide to fund any higher capital requirements by retaining local profits, they are unlikely to require additional capital domestically.”
NAB does not expect the proposed changes to impact its required capital, but like its three rivals in the big four, it appears the most significant changes would be those for Level 1 regulatory capital.
As at 31 March, NAB’s Level 1 and Level 2 CET1 ratios were 10.64 per cent and 10.4 per cent respectively.
“Under the proposed standard, there is minimal impact on NAB’s Level 1 CET1 ratio and NAB’s Level 2 CET1 ratio would be unchanged,” NAB said.
Meanwhile Westpac said there is no impact on regulatory capital on a Level 2 basis, but it is already trying to meet prudential requirements for Level 1 Capital.
In addition to its New Zealand subsidiary, Westpac has equity investments in other subsidiaries which are each below the 10 per cent limit.
“Westpac must continue to meet prudential requirements for Level 1 capital which may ultimately impact capital ratios on a Level 2 basis,” the bank said.
ANZ said the net impact on its group is unclear, but it does not expect its Level 2 capital to be affected.
“Based on ANZ’s investment in its subsidiaries as at 30 June 2019 and in the absence of any offsetting management actions, this implies a reduction in ANZ’s Level 1 CET1 capital ratio of up to approximately $2.5 billion (75 basis points),” ANZ said.
“However, ANZ believes that this outcome is unlikely and, post implementation of management actions, the net capital impact could be minimal.”
CBA commented: “If implemented, the proposals will not impact CBA’s Level 2 CET1 ratio.
“On a pro-forma basis, based on CBA’s current equity investments, and assuming the RBNZ capital proposals require CBA to inject approximately NZ$3 billion of additional capital into ASB Bank, the proposals would reduce CBA’s Level 1 CET1 ratio by approximately 30bps.”
APRA’s consultation process for the prudential standard ends on 31 January, with the regulator intending to finalise the changes in early 2020 and implement the revised standard from the start of 2021.
The RBNZ is expected to release the result of its consultation in early December.
“Both APRA and the RBNZ will continue to maintain an open dialogue as we work to strengthen the resilience of our respective financial systems and protect the interests of depositors in each country,” Mr Lonsdale said.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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