More hybrids and other issues to come from our slimming banks?
That could be the outcome of a new move by APRA, the banking regulator to force banks to hold more loss-absorbing capital by 2023.
In a discussion paper on its website on Thursday APRA said it was asking for comments from banks and others on its proposed idea to strengthen the financial system’s ability to cope with future shocks.
The news saw most of the big banks enjoy solid gains – ANZ shares rose 2.2% and Westpac and CBA shares were both up 1.8% Only the NAB weakening as it went ex-dividend – the shares falling 3.6% to $24.93.
If the ALP does win next year’s election and then goes through with its plans to end negative gearing ad dividend imputation income benefits for retirees, high yielding hybrids or other forms of fixed interest securities will find solid demand.
APRA has already forced the big banks twice since 2015 to boost capital (Tier One, the most resilient) to a 10.5% rate by 2020.
In its paper, APRA proposed lifting total capital requirements for the country’s four biggest lenders by four to five percentage points by 2023.
Other banks should escape without being required to boost capital, although APRA said there could be exceptions “depending on the outcome of resolution planning” (that is, checking to see that the banks have enough capital to cover potential losses in the event of collapse).
“As ADIs will be able to use any form of capital to meet increased Total Capital requirements, APRA anticipates the bulk of additional capital raised will be in the form of Tier 2 capital, the paper stated.
“The proposed changes are expected to marginally increase each major bank’s cost of funding – incrementally over four years – by up to five basis points based on current pricing. This is not expected to have an immediate or material effect on lending rates.
“APRA proposes that the increased requirements will take full effect from 2023, following relevant ADIs being notified of adjustments to Total Capital requirements from 2019.
In addition to the proposals outlined in this discussion paper, APRA intends to consult on a framework for recovery and resolution in 2019, which will include further details on resolution planning,“ APRA added.
“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,” APRA Chairman Wayne Byers said in a statement with the paper.
The big four – Commonwealth Bank of Australia , Westpac, ANZ and National Australia Bank – hold a combined market share of more than 80%, raising fears their failure could fatally damage the broader economy. They are systemically important banks and financial groups (as are AMP and Macquarie Group).
The banks are under enormous pressure from what has been disclosed so far by the banking royal commission which exposed widespread misconduct in the industry. Big four bank CEOs, including Macquarie and AMP are due before the Commission’s final sessions in Sydney and Melbourne from next week.
Billions of dollars have been knocked from the market capitalisation of the banks in the wake of the revelations, as investors price in an anticipated tightening of regulations.
The banks are in the process of revamping their businesses by selling off unwanted assets here and in Australia and taking the funds and using them to boost tier one capital towards the 10.5% minimum by 2020.