APRA improves capital-raising options for mutual ADIs

The Australian Prudential Regulation Authority (APRA) has today released an amended Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111), which provides additional capital-raising options for mutually owned authorised deposit-taking institutions (mutual ADIs).

Under the Basel III capital framework, Additional Tier 1 (AT1) and Tier 2 (T2) Capital instruments must be written-off or converted to ordinary shares if relevant loss absorption or non-viability provisions are triggered. However, conversion into ordinary shares is not possible for mutual ADIs due to their mutual corporate structure.

In its letter of October 2013, APRA proposed to allow mutual ADIs to issue AT1 or T2 Capital instruments that could, if the relevant conversion provisions were triggered, convert to ‘mutual equity interests’ in the issuing ADI. On conversion, mutual equity interests would be included as Common Equity Tier 1 (CET1) Capital for capital adequacy purposes. Subsequent feedback from industry was supportive of APRA’s proposals.

Accordingly, APRA has amended APS 111 to give effect to this change. The change is consistent with discretion given to supervisory authorities, under the Basel III capital framework, to take into account the specific constitution and legal structure of non-joint stock companies, such as mutuals, provided that the substantive quality of regulatory capital is preserved.

APRA has also liaised closely with the Australian Securities and Investments Commission (ASIC) to ensure that the requirements for the issue of mutual equity interests are consistent with ASIC’s guidance under Regulatory Guide 147 Mutuality ― Financial Institutions (RG 147) and the Corporations Act 2001.

APRA’s letter to mutual ADIs announcing the change, and the amended APS 111, can be found on APRA’s website.