November 08, 2018

APRA proposed changes to the application of the capital adequacy framework for authorized deposit-taking institutions to support orderly resolution in the unlikely event of failure. The consultation period ends on February 08, 2019. In addition to the proposals outlined in this discussion paper, APRA intends to consult on a framework for recovery and resolution in 2019, which will include further details on resolution planning.

The proposals would ensure authorized that deposit-taking institutions have adequate financial resources available to support orderly resolution in the highly unlikely event of failure. This will be achieved by adjusting, where appropriate, an authorized deposit-taking institution's Total Capital requirement. APRA is proposing an approach on loss-absorbing capacity that is simple, flexible, and designed with the distinctive features of the Australian financial system in mind; the approach has been developed in collaboration with the other members of the Council of Financial Regulators. The key features of the proposals include the following:

  • For the four major banks—increasing Total Capital requirements by four to five percentage points of risk-weighted assets 
  • For other authorized deposit-taking institutions—likely no adjustment, although a small number may be required to maintain additional Total Capital depending on the outcome of resolution planning

The Australian government’s 2014 Financial System Inquiry (FSI) recommended that APRA should implement a framework for loss-absorbing and recapitalization capacity, in line with the emerging international practices, sufficient to facilitate the orderly resolution of Australian authorized deposit-taking institutions and minimize taxpayer support. The government supported this recommendation in its response to FSI. As authorized deposit-taking institutions will be able to use any form of capital to meet increased Total Capital requirements, APRA anticipates the bulk of additional capital raised will be in the form of tier 2 capital. The proposed changes are expected to marginally increase each major bank’s cost of funding—incrementally over four years—by up to five basis points, based on current pricing. This is not expected to have an immediate or material effect on lending rates. APRA proposes that the increased requirements will take full effect from 2023, following the relevant authorized deposit-taking institutions being notified of adjustments to Total Capital requirements from 2019.

 

Related Links

Comment Due Date: February 08, 2019

Keywords: Asia Pacific, Australia, Banking, Orderly Resolution, Loss Absorbing Capacity, Recovery and Resolution, Total Capital Requirement, APRA

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