APRA wants big banks to increase capital buffers to improve ‘loss-absorbing capacity’

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  • APRA has announced a proposal that will require the big Australian banks to further increase their capital buffers.
  • The move is expected to increase funding costs for the big banks by 5 basis points (0.05%) over a staggered four-year period.
  • Shares in the big banks posted gains in early trade, with the exclusion of NAB which went ex-dividend.

Banking regulator APRA has announced a proposal to increase minimum capital requirements for the big banks.

The measures are aimed at improving the “loss-absorbing capacity” of Australia’s financial institutions, within their existing capital structure.

Based on current prices, APRA said the changes will increase the cost of funding for the big four by around 5 basis points (0.05%). The increase will be absorbed incrementally over a four year period, starting in 2019.

“This is not expected to have an immediate or material effect on lending rates,” APRA said.

Banks will be free to raise the capital in any way they choose. As part of the composition of each bank’s Total Capital requirements, APRA said it expects the bulk of the funds to be raised via Tier 2 capital.

For the big four banks, the move is expected to increase TCR by “four to five percentage points of risk-weighted assets (RWA)”.

Source: APRA

For smaller lenders, APRA said there’s likely to be no adjustment.

“The aim of these proposals — and resolution planning more broadly — is to ensure that the failure of a financial institution can be resolved in an orderly fashion, which protects the interests of beneficiaries and minimises disruption to the financial system,” APRA chairman Wayne Byres said.

The proposals have been released in the form of a discussion paper, and APRA is now seeking feedback from industry stakeholders.

Shares in the big banks were slightly higher this morning, led by ANZ which posted an early gain of 1%.

The exception was NAB, was fell by around 4% after going ex-dividend. NAB also released a brief statement following APRA’s announcement this morning.

“Based on NAB’s RWA of $390 billion at September 30 2018, this represents an incremental increase of $16-$19 billion of Total Capital, with a corresponding decrease in senior debt issuance,” NAB said.