Australia’s banking regulator has said it wants the big four banks to hold more capital – a reform that it expects to have a minimal effect on home loan interest rates.
APRA has proposed that ANZ, Commonwealth Bank, NAB and Westpac increase their total capital requirements by four to five percentage points of risk-weighted assets – in other words, hold on to more money.
That would force the major banks to lift their total capital requirements from 14.5 per cent to between 18.5 and 19.5 per cent.
It is also possible that “a small number” of other lenders may be required to maintain additional total capital, depending on the outcome of resolution planning.
APRA has forecast that “the bulk” of additional capital raised will be easier-to-acquire Tier 2 capital rather than harder-to-acquire Tier 1 capital.
The difference between Tier 1 and Tier 2 capital
“Under the Basel Accord, a bank’s capital consists of Tier 1 capital and Tier 2 capital, and the two types of capital are different. Tier 1 capital is a bank’s core capital, whereas Tier 2 capital is a bank’s supplementary capital. A bank’s total capital is calculated by adding its Tier 1 and Tier 2 capital together.” Source: Investorpedia
Hope for the best, prepare for the worst
APRA said the aim of the proposed changes was to ensure lenders have sufficient financial resources “to support orderly resolution in the highly unlikely event of failure”.
Under APRA’s plan, lenders will be notified of any required changes from 2019, with the increased requirements scheduled to take full effect from 2023.
Chairman Wayne Byres said that while Australia’s banking system has become more resilient over the past decade, the possibility of a bank failure cannot be discounted.
“Therefore, in addition to strengthening the resilience of the financial system, it is prudent to plan for the unlikely event of failure,” he said.
“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.”