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APRA consults on changes to mutually owned ADIs’ capital framework

Wednesday 26 July 2017

 

The Australian Prudential Regulation Authority (APRA) has released for consultation a discussion paper on proposed revisions to the capital framework for mutually owned authorised deposit-taking institutions (ADIs) to enable them to directly issue Common Equity Tier 1 (CET1) capital instruments.

In 2014, APRA developed a Mutual Equity Interest (MEI) framework for mutually owned ADIs that enables them to issue Additional Tier 1 and Tier 2 capital instruments that meet requirements for conversion into CET1 capital in certain circumstances. Because of their structure, mutually owned ADIs have traditionally not been able to issue ordinary shares that could qualify as CET1 capital.

The consultation announced today concerns proposed amendments to this MEI framework to allow mutually owned ADIs to issue CET1-eligible capital instruments directly. The proposed changes are intended to give mutually owned ADIs more flexibility in their capital management.

These proposed CET1-eligible capital instruments would share many of the same characteristics as ordinary shares and would, for example, be perpetual, subject to discretionary dividends and accounted for as equity. However, because these instruments are untested, APRA is proposing some restrictions on the amount that may be included in CET1 and, to accommodate the mutual corporate structure of issuing ADIs, proposes limits on MEI holders’ share of residual assets.

Following consideration of submissions received through this consultation, APRA anticipates it will release the final revised APS 111 in late 2017 for commencement as soon as practicable thereafter.

Copies of the discussion paper and draft revised APS 111 are available on APRA’s website.

Capital framework

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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6.5 trillion in assets for Australian depositors, policyholders and superannuation fund members.