Australia's Major Banks Set to Increase Loss-Absorption Capital

(Bloomberg) -- Australia’s major banks will have to raise more capital under new proposals from the prudential regulator aimed at ensuring lenders could be wound-up in an orderly fashion in the event of failure.

  • The Australian Prudential Regulation Authority is proposing the major banks increase total capital by 4-to-5 percentage points of risk-weighted assets.

Key Insights

  • Banks will be able to use any form of capital to meet the increased requirements, with APRA expecting the majority raised to be Tier 2 capital, which converts to ordinary shares or is written off at the point of non-viability.
  • The additional capital requirements, which APRA estimates will increase the cost of funding by as much as 5 basis points over the next four years, will be an additional headwind to an industry already battling declining profitability.
  • APRA has adopted a much simpler approach than other jurisdictions -- in Europe entirely new forms of loss-absorbing instruments have been introduced -- which will make the process more straightforward for Australian banks.

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