Proposed changes to ensure banks have adequate financial resources in the event of failure have been welcomed by groups as a response to the perception that some banks are too big to fail.
The Australian Prudential Regulation Authority (APRA) released a paper proposing changes to the application of the capital adequacy framework for authorised deposit-taking institutions (ADIs).
The Australian Government’s 2014 Financial System Inquiry (FSI) recommended APRA implement a framework for loss absorbing and recapitalisation capacity in line with emerging international practice. This would be achieved by adjusting, where appropriate, an ADI’s Total Capital requirement.
The key features of APRA’s proposals include:
for the four major banks – increasing Total Capital requirements by four to five percentage points of risk-weighted assets; and,
for other ADIs – likely no adjustment, although a small number may be required to maintain additional Total Capital depending on the outcome of resolution planning.
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 proposed the increased requirements will take full effect from 2023, following relevant ADIs being notified of adjustments to Total Capital requirements from 2019.
APRA Chairman Wayne Byres said one of APRA’s core functions as Australia’s prudential regulator is to plan for, and if required, execute the orderly resolution of the financial institutions it regulates.
He said, “The resilience of the Australian banking system continues to improve, underpinned by the build-up of capital over the last decade.
“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 Customer Owned Banking Association (COBA) welcomed the proposals.
COBA CEO Michael Lawrence said, “The proposed response is better late than never and we note that APRA is proposing to give the major banks until 2023 to implement the measure.
“APRA estimates the total funding cost impact from increasing major bank capital requirements would not be greater than five basis points in aggregate.
“Again, this is better than nothing and any move to level the playing field is welcome.
“The implicit guarantee provided by taxpayers to the major banks gives them an unfair funding cost advantage over their smaller competitors and distorts competition.
“Reducing unfair advantages for the biggest players in the market is good for competition and a more competitive market will benefit consumers.”