Australian banks win regulator concession on capital buffer needs

Bloomberg

Australia’s banking regulator has softened its capital buffer requirement on the nation’s largest banks after they argued that there wasn’t sufficient market capacity available to raise the necessary funds.
The so-called Big Four banks will need to lift their total capital by three percentage points of risk-weighted assets by January 2024, less than an initial target of four to five percentage points, the Australian Prudential Regulation Authority (APRA) said.
The higher target remains the longer-term goal once APRA has considered ways to boost the pool of available capital.
APRA proposed changes to the country’s capital adequacy framework last November to better ensure lenders could be wound-up in an orderly fashion in the event of failure.
S&P Global Ratings welcomed the move on Tuesday, raising its outlook on the four banks.
Bank regulators around the world are taking steps to boost the loss-absorbing capacity of systemically important banks in a bid to safeguard the financial system in the event of another crisis.
APRA is adopting a simpler approach to other jurisdictions, allowing banks to issue Tier-2 capital that converts to ordinary shares or is written off at the point of non-viability.
The softening of the additional capital buffers comes after the banks raised concerns the market wasn’t able to absorb the extra Tier-2 capital issuance and had the potential to excessively increase funding costs as they battle declining profitability.
The regulator estimates the extra $35 billion the major banks will need to raise will lift their overall funding costs by less than five basis points.
“Although APRA’s proposed response may increase funding costs for Tier 2 instruments issued by major banks, overall funding cost increases can be expected to remain small,” APRA Deputy Chairman John Lonsdale said.
“Increasing total capital requirements by three percentage points by 2024, instead of the four to five originally proposed, will be easier for the market to absorb and reduce the risk of unintended market consequences.”
S&P lifted the outlook on the banks to stable from negative and Macquarie Bank Ltd. to positive from developing, saying their increased loss-absorbing capacity could lessen the need for taxpayer bailouts.
Still, it added that the plan wouldn’t impede the government from supporting a systemically important bank in a crisis if needed.