The Australian Prudential Regulation Authority (APRA) has launched a review of the capital treatment of authorised deposit-taking institutions’ (ADIs’) investments in their banking and insurance subsidiaries.
APRA initiated the review to update the relevant prudential standard, and ensure that the appropriate capital treatment is applied to investments in subsidiaries. APRA’s approach was in part shaped by the Reserve Bank of New Zealand (RBNZ) proposal for New Zealand’s banks to materially lift their regulatory capital. The RBNZ proposal would impact Australia’s major banks, which are the owners of New Zealand’s four largest banks.
To ensure Australian deposit holders continue to be protected when the major banks hold significant investments in subsidiaries, APRA has proposed changes to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111), which establishes the criteria for ADIs’ regulatory capital requirements.
These proposals will in effect increase the amount of equity required to support investments in large subsidiaries and reduce that for small subsidiaries. The proposals seek to balance the benefits of revenue diversification that banks can achieve by owning subsidiary operations against the potential concentration risk that arises as these investments increase in size.
In a consultation paper released today, APRA has proposed:
- increasing the capital ADIs must hold to offset concentrated exposures to foreign or domestic banking or insurance subsidiaries;
- reducing the capital ADIs must hold to offset smaller exposures to banking or insurance subsidiaries;
- incorporating into the prudential standard various rulings and technical information APRA has published since APS 111 was last substantially updated in 2013; and
- aligning APS 111 with updated guidance from the Basel Committee on Banking Supervision.
APRA held discussions with the RBNZ regarding its proposed revisions to APS 111.
APRA estimates that no material additional capital will be required at an aggregate industry level; however individual ADIs may need to raise capital, or may gain a capital benefit, depending on the level of their exposures to subsidiaries.
APRA Deputy Chair John Lonsdale said: “An ADI’s capital base is the cornerstone of its financial soundness and ability to meet its obligations to deposit-holders.
“These proposed measures seek to support the resilience of the major banks' Australian operations. In relation to New Zealand, there are a number of options available to the banks. If they decide to fund any higher capital requirements by retaining local profits, they are unlikely to require additional capital domestically.
“Both APRA and the RBNZ will continue to maintain an open dialogue as we work to strengthen the resilience of our respective financial systems and protect the interests of depositors in each country,” Mr Lonsdale said.
APRA intends to finalise changes to APS 111 after the consultation period closes on 31 January 2020. The updated prudential standard is expected to come into force from 1 January 2021.
The Information Paper and draft APS 111 can be found at: Revisions to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital.