MoneyAPRA wants big banks to increase capital buffers to improve 'loss-absorbing capacity'

23:32  08 november  2018
23:32  08 november  2018 Source:   businessinsider.com.au

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A capital buffer is mandatory capital that financial institutions are required to hold in addition to other minimum capital requirements. To reduce the likelihood of banks running into trouble during economic downturns, regulators began requiring banks to build up capital buffers outside periods of

Capital requirements for banks have been raised since the Global Crisis in order to increase their resilience during periods of distress. The aim of equity capital requirements and of the other liability-related bail-in methods is essentially to create buffers that are capable of absorbing losses and

APRA wants big banks to increase capital buffers to improve 'loss-absorbing capacity'© Getty Gary Friedman/ Los Angeles Times via Getty Images 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.

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Capital provides a loss - absorbing cushion for banks in times of financial stress. "Australia has a robust and profitable banking industry and APRA believes this latest capital strengthening Being better capitalised lowers profitability for banks , and APRA estimated that if banks tried to offset the

Bank resolution and recovery - bank supervision. (TLAC, sometimes T-LAC). The term eventually favoured by the Financial Stability Board (replacing Gone-concern or Gone Concern Loss Absorbing Capacity - GCLAC or GLAC) to describe the debt or capital available to absorb losses in (mostly)

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)".

APRA wants big banks to increase capital buffers to improve 'loss-absorbing capacity'© Supplied 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.

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