APRA lifts bank capital buffers to protect savers

The prudential regulator will strengthen its ability to safely resolve a future banking crisis, calling for banks to lift their “total loss absorbing capital” buffers by half to 4.5 per cent, to ensure depositors are protected should a bank looks like it might fail.

Bank debt issuance will rise on the back of the higher buffer, announced by the prudential regulator on Thursday morning. Banks will have four years to build the reserves, with the new settings coming into force on January 1, 2026.

Superannuation funds and insurers will also have to lift their buffers, as the Australian Prudential Regulation Authority consults on strengthening two prudential standards relating to preparedness for a financial crisis, one for the large banks and the other for the whole market.

In ASX releases on Thursday morning, National Australia Bank said the additional 1.5 per cent of risk-weighted assets represented an increase of $6.3 billion of total capital.

NAB said it would meet this “primarily” through issuing tier 2 capital, which includes hybrid debt.

ANZ said it “expects to be able to meet the additional total capital requirement through tier 2 capital” but did not quantify how much additional dollars of capital would be required.

APRA said the major banks “have already made significant progress towards meeting [the TLAC] requirement”. They have raised $50 billion of additional tier 2 capital since APRA announced an interim TLAC buffer of 3 per cent in 2019.

The need for tougher TLAC standards was originally flagged in the financial system inquiry chaired by David Murray in 2014.

They form part of a global body of work referred to as frameworks for banks that are too-big-to-fail, which gathered momentum after the global financial crisis.

Total loss absorbing capital (TLAC) is the fourth type of capital in the bank capital stack, which also includes “common equity tier 1” (CET1), “additional tier 1” and “tier 2”. Before changes to the bank capital framework started in 2018, major banks held total capital of 13 per cent of their risk-weighted loans; when the TLAC changes come into force from 2026, the total level of capital will be 18.25 per cent of RWA, with the CET1 requirement also expanding.

Confirmation of the final settings for TLAC comes just two days after APRA set expectations for banks’ CET1 settings, reducing the minimum CET1 requirement to 10.25 per cent from 10.5 per cent, although banks are expected to hold additional CET1 above the minimum.

APRA first flagged the new TLAC framework during a consultation in 2018 and in a release in July 2019 set an interim 3 per cent buffer. At that time, it indicated the final buffer could be set at between 4 per cent and 5 per cent.

APRA said its decision to set the requirement at 4.5 per cent was based on historical losses experienced by large banks internationally, including during the GFC; loss-absorbing capacity requirements set by other countries and levels held by global banks; and the level of banks’ tier 2 debt issuance, market capacity and funding costs.

APRA has also kicked off a five-month consultation on the prudential standards known as CPS 190 and CPS 900. It closes on April 29, 2022.

This will ensure all APRA-regulated entities have plans for responding to severe financial stress. The standards also ensure big banks and complex entities take pre-emptive actions so “in the event of their failure, APRA can resolve them with limited adverse impacts on the community and the financial system”.

“Crisis preparedness and resolution planning gets to the very heart of APRA’s purpose to protect the financial interests of bank depositors, insurance policyholders and superannuation members,” said APRA deputy chair John Lonsdale.

“Although Australia has one of the strongest and most stable financial systems in the world, and failures are extremely rare, businesses in any competitive market can face financial difficulties.

“Should that happen, we want to be sure each entity has the capability to either recover, or manage an orderly exit with the smallest possible impact on the community and the financial system.”

Mr Lonsdale said APRA-regulated entities have made “substantial improvements” in contingency planning over recent years, but “a consistent, transparent and enforceable” framework would allow the regulator to strengthen its crisis preparedness and close the gaps in the qualities of plans.

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