In an October 2019 consultation, APRA proposed that banks would have to hold more capital against equity investments in large subsidiaries.
APRA (Australian Prudential Regulation Authority) has released a response to submissions on proposed measures to enhance the capital adequacy of ADIs.
The measures were proposed in an October 2019 consultation, including a revision that will require ADIs to increase the amount of capital required to support equity investments in large subsidiaries and reduce the amount required for small subsidiaries.
The move was aimed at reducing the potential risks to Australian depositors from large and leveraged equity investments.
Under the revised draft standard on capital adequacy (APS 111), banks will need to risk-weight equity investments in subsidiaries at 250 percent up to a limit of 10 percent of level 1 CET1 capital. Equity investments over the 10 percent threshold would be required to be met dollar-for-dollar by the parent company.
Currently, existing equity investments in banking and insurance subsidiaries is risk-weighted at 300 percent if the subsidiary is listed, and 400 percent if it is unlisted.
In November, APRA said existing equity investments can retain the current risk weighting as an interim measure. but that any new or additional equity investments made should be undertaken with the proposed policy in mind, though it will not be finalised until later this year.
APRA says it does not expect the new policy to increase system capital requirements, though the impact will be felt differently across individual ADIs. The proposed revision is now being finalised, the regulator says.
Following the consultation, APRA has clarified that CET1 capital should be calculated after all regulatory adjustments, excluding any capital deduction resulting from equity investments in banking and insurance subsidiaries exceeding the 10 percent threshold. This is to avoid a ‘circular reference’.
The draft standard also removes complex issuance structures such as stapled security structures and special purpose vehicles, which APRA says would increase complexity and reduce transparency in the Australian capital framework.
Respondents to the consultation requested that APRA allow complex issuance structures involving SPVs to reduce the additional costs from the RBNZ’s proposed changes to its definitions of AT1 and Tier 2 capital. APRA has maintained its original proposal.
The revised draft standard also contains further minor revisions for consultation which were not included as part of the 2019 consultation, including clarifications on various aspects of the standard, and adding in technical information and updated guidance from the BCBS (Basel Committee on Banking Supervision).
These revisions include measures to clarify that CET1 capital is not permitted to have any unusual features that could undermine its role as the highest quality loss absorbing capital.
APRA has opened a new consultation on the additional revisions until 10 June 2021, available here. The consultation package includes a response paper and the revised draft APS 111.
APRA expects to finalise the changes to APS 111 in the second half of 2021.
The revised standard will come into force from 1 January 2022.