Pragmatic recognition

Ratings agency S & P Global Ratings said the proposal suggests no change in the level of Australian government support of the major banks. It said when the plan becomes law, it may revise its outlook for the major banks to 'stable' from their current 'negative'.

"In our view, today's announcement is a pragmatic recognition that the Australian government considers that it remains imperative for the government to be highly supportive of the systemically important banks, and that the government would very likely provide additional financial support, if needed," S & P said.

ANZ Banking Group shares jumped 2.3 per cent, while Commonwealth Bank and Westpac shares both rose 1.8 per cent. NAB shares lost 3.6 per cent as they traded ex-dividend.

APRA said "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.

APRA said banks are most likely to raise more Tier 2 debt capital to meet the new requirements. Photo: Patrick Cummins

"This is not expected to have an immediate or material effect on lending rates."

However, Westpac said in an ASX statement "it is not possible at this point to determine the actual total cost for Westpac", because additional supply of Tier 2 capital in the market will impact pricing and the costs of other funding sources are also likely to change.


Full effect by 2023

The new requirements – designed to ensure banks are able to be resolved in an orderly fashion in the unlikely event of a failure – will take full effect from 2023. They will require the major banks to hold a total capital buffer of around 19 per cent, up from 14.5 per cent.

National Australia Bank said based on its total risk-weighted assets of $390 billion at September 30, it will need an "incremental increase of $16 billion to $19 billion of total capital, with a corresponding decrease in senior debt issuance."

Westpac said based on its risk-weighted assets of $425 billion at September 30, it will need an "incremental increase of around $17 billion to $21 billion of total capital, with a corresponding decrease in other forms of funding".

ANZ said based on its risk-weighted assets of $391 billion at September 30 it would need an "incremental increase in total capital of approximately $16 billion to $20 billion, with an equivalent decrease in other senior funding".

CBA said based on its risk-weighted assets of $461 billion at September 30, it would require "an incremental increase of approximately $18 billion to $23 billion of total capital" and CBA "expects that this requirement would result in a decrease in other forms of funding".

Moody's Investors Service associate managing director Patrick Winsbury said it views the changes "as credit positive for the banking industry".


"No matter how resilient financial institutions are, the possibility of failure cannot be entirely removed," APRA chairman Wayne Byres says. Dominic Lorrimer

Balancing act

"We also believe that the changes, if implemented, will strengthen bank balance sheets further, consistent with APRA's target of making Australian banks 'unquestionably strong'."

APRA's move comes alongside moves by the Financial Stability Board to create a total loss-absorbing capacity (TLAC) standard for 30 of the world's most systemically important banks. The policies are designed to reduce the need for "too big to fail" banks to require government support in a crisis.

The introduction of TLAC policies are a delicate balancing act, because they can lead global ratings agencies to reduce their assumptions that banks will receive implicit government support in a crisis (given a bigger capital buffer reduces the need for such support), which could trigger a ratings cut.

But S & P Global Ratings said on Thursday that Australia's model creates no such issue.

"An increased level of loss-absorbing tier-2 hybrids, a consequence of implementing the proposal by APRA, could lessen the need for the Australian government to recapitalise these banks if they were to experience distress," S & P said. "At the same time, we believe that the proposal points to a continued heavy reluctance by Australian policymakers and the government to allow a default on any senior unsecured obligations of these institutions."

APRA said it has worked with the Council of Financial Regulators on the approach which will be "simple, flexible and designed with the distinctive features of the Australian financial system in mind".


APRA said for banks outside the big four, there is likely to be no adjustment, "although a small number may be required to maintain additional total capital depending on the outcome of resolution planning". It is also consulting on a new framework for banks recovery and resolution next year.

"The resilience of the Australian banking system continues to improve, underpinned by the build-up of capital over the last decade," said APRA chairman Wayne Byres in a statement.

Possibility of failure

"However, no matter how resilient financial institutions are, the possibility of failure cannot be entirely removed. Therefore, in addition to strengthening the resilience of the financial system, it is prudent to plan for the unlikely event of failure. "The events of the global financial crisis demonstrated the impact that failures can have on the broader financial system and the subsequent social and economic consequences.

"The aim of these proposals and resolution planning more broadly is to ensure that the failure of a financial institutions can be resolved in an orderly fashion, which protects the interests of beneficiaries and minimises disruption to the financial system."

The loss absorbing capacity capital work is separate from APRA's moves to increase common equity tier 1 (CET1) capital to levels that are 'unquestionably strong'.

The increase in loss-absorbing capacity capital follows a recommendation of the 2014 financial system inquiry for APRA to implement a framework "in line with emerging international practice, sufficient to facilitate the orderly resolution of Australian ADIs and minimise taxpayer support". This was supported by the government in its response to the FSI.

A discussion paper seeks feedback from stakeholders on the proposals. Submissions are due by February 8.