APRA published a letter responding to the submissions on proposed changes to the application of the capital adequacy framework designed to support the orderly resolution of a failing authorized deposit-taking institution. In November 2018, APRA had proposed that the four domestic systemically important banks (D-SIBs) be required to increase their total capital by four to five percentage points of risk-weighted assets (RWA) over four years. Post consultation, APRA will require the major banks to increase total capital by three percentage points of RWA by January 01, 2024.
APRA had expected that banks would meet the bulk of the increased capital requirement by raising additional tier 2 capital. APRA received seven submissions to the consultation and met with a range of relevant stakeholders, including authorized deposit-taking institutions, rating agencies, and other market participants, and continued to consult with the Council of Financial Regulators. APRA also had extensive dialog with the authorized deposit-taking institutions, arrangers of tier 2 issuance in global markets, and significant investors in tier 2 instruments. APRA amended its initial proposal in response to the concerns raised in a number of submissions about a lack of sufficient market capacity to absorb an extra 4% to 5% of RWA in tier 2 issuance and the potential to excessively increase bank funding costs. A number of respondents provided useful market capacity analysis in their submissions. Following this consultation process, APRA expects that the issuance of an additional 3% of RWA in tier 2 instruments can be achieved in an orderly manner and be maintained through varied market conditions.
However, the overall long-term target of an additional four to five percentage points of loss-absorbing capacity remains unchanged. Over the next four years, APRA will consider the most feasible alternative method of sourcing the remaining one to two percentage points, taking into account the characteristics of the Australian financial system. In addition, as per the proposal, for small to medium authorized deposit-taking institutions, extra loss-absorbing capacity would be considered on a case-by-case basis as part of the resolution planning process. The changes would increase the financial resources available for APRA to safely resolve an authorized deposit-taking institution and minimize the need for taxpayer support, in the unlikely event of failure. They also fulfill a recommendation from the 2014 Financial System Inquiry that APRA implement a framework for minimum loss-absorbing and recapitalization capacity.
- Media Release
- APRA Response Letter (PDF)
- Stakeholder Responses to Consultation
- Discussion Paper, November 2018 (PDF)
Effective Date: January 01, 2024
Keywords: Asia Pacific, Australia, Banking, Loss Absorbing Capacity, Recovery and Resolution, Orderly Resolution, Regulatory Capital, Basel III, D-SIBs, Systemic Risk, APRA
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