With New Zealand recently lifting the capital requirements of its banks, APRA could soon follow suit – undertaking a review into how much equity Australian banks should be holding.
The prudential regulator said a proposal to alter capital requirements will have the effect of increasing the amount of equity required to support investment in large subsidiaries while reducing capital requirements for smaller subsidiaries.
It estimates that no material additional capital will be required at an aggregate industry level, but individual authorised deposit-taking institutions may need to raise capital or may gain a capital benefit depending on the level of their exposure to subsidiaries.
“These proposed measures seek to support the resilience of the major banks’ Australian operations,” according to APRA deputy chair John Lonsdale.
He said that as the environment currently stands, there are a number of options available to the banks operating in both Australia and New Zealand.
“If they decide to fund any higher capital requirements [in New Zealand] by retaining local profits, they are unlikely to require additional capital domestically.”
How are the big four affected?
With its strong kiwi links, ANZ is the most at risk, although it said its “management actions" may offset much of the $2.5 billion common equity tier 1 (CET1) shortfall.
It is already in the practice of migrating NZ loans to an Australian branch, increasing exposure to Asian subsidiaries.
NAB said its initial assessment was that the proposed changes would not, on a pro forma basis, affect the amount of capital it has to hold.
Westpac also considered there to be no impact from this proposal on the calculation of the group’s reported regulatory capital ratios on a level 2 basis, which are the key ratios reported.
Nevertheless, Westpac must continue to meet prudential requirements for level 1, which may ultimately be impacted.
The Commonwealth Bank of Australia stated that as at 30 June 2019, its level 1 CET1 ratio was 11.2 per cent, which was 50 bps higher than the level 2 CET1 ratio 10.7 per cent.
What is APRA trying to achieve?
The proposed increases to holding of capital reportedly aims to balance the benefit of revenue diversification that banks can achieve by owning subsidiary operations against the potential concentration risk that occurs as those investment increase in size.
In particular, the prudential regulator is proposing that equity investments in subsidiaries (including additional tier 1 and tier 2 capital investment in subsidiaries) will be risk weighted at 250 per cent, up to a limit of 10 per cent of level 1 CET1 capital.
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