The Australian Prudential Regulation Authority (APRA) has today released an information paper on its framework for dealing with domestic systemically important banks (D-SIBs) in Australia.
In October 2012, the Basel Committee on Banking Supervision finalised its D-SIB framework, which involves a set of principles on the methodology to identify D-SIBs and on the higher loss absorbency (HLA) capital requirement for banks identified as D-SIBs. The Basel Committee’s framework responds to the strongly held view of the G20 Leaders, including Australia, that no financial firm should be ‘too-big-to-fail’ and that taxpayers should not bear the cost of resolution. The framework also emphasises that other policy tools, such as more intensive supervision, can play an important role in dealing with D-SIBs.
The information paper provides details on the methodology APRA has used to identify D-SIBs in Australia and how the higher loss absorbency (HLA) capital requirement will apply.
APRA’s assessment methodology has regard to the Basel Committee’s four key indicators of systemic importance: size, interconnectedness, substitutability and complexity. Based on its assessment of these indicators, APRA has determined that the following authorised deposit-taking institutions are D-SIBs:
- Australia and New Zealand Banking Corporation
- Commonwealth Bank of Australia
- National Australia Bank
- Westpac Banking Corporation.
The HLA capital requirement for D-SIBs is intended to reduce the probability of failure compared to non-systemic institutions, reflecting the greater impact a D-SIB failure is expected to have on the domestic financial system and economy. Based on a range of considerations, APRA has determined that a one per cent HLA requirement will apply to the four D-SIBs. This must be met by Common Equity Tier 1 capital and will be implemented as an extension of the capital conservation buffer as defined in Prudential Standard APS 110 Capital Adequacy.
The D-SIB framework will come into effect from 1 January 2016.
The four D-SIBs in Australia currently hold significant management capital buffers above the minimum requirements set by APRA; they also have strong capital generation capacity through earnings retention. The D-SIBs already hold sufficient Common Equity Tier 1 capital to meet the capital conservation buffer in full from 1 January 2016 and are expected to have sufficient Common Equity Tier 1 to meet the one per cent D-SIB extension to that buffer from that date. APRA therefore does not believe that phase-in arrangements for the HLA requirement, beyond the two-year lead time, are necessary.
At 1 January 2016, the management capital buffers of the D-SIBs may be lower than current levels if they are used to absorb some part of the HLA capital requirement. APRA considers it reasonable if D-SIBs choose to operate with relatively lower management capital buffers from that date given the nature and size of the extended capital conservation buffer.
APRA emphasises that the designation of a bank as a D-SIB does not make it immune from failure. Rather, the designation is intended to ensure that banks perceived to be ‘too-big-to-fail’ are subject to more intense supervisory oversight and have greater capacity to absorb losses, to increase their resilience to failure.