Higher capital buffers for big 4 help competition: COBA

Last week, APRA revealed that it had written to the big four banks, finalising additional capital requirements, which are geared towards maintaining loss-absorbing capacity (LAC).

From 1 January the major banks will need to comply with a rise in minimum total capital requirements of 4.5 percentage points of their risk-weighted assets.

In the unlikely event of a major bank’s failure, APRA wants it to be prepared to recapitalise using a large pool of private, rather than taxpayer, funds.

According to the regulator, the banks have already made progress towards the requirement, having met interim targets following a consultation in 2018.

APRA deputy chair John Lonsdale commented the failure of a financial institution could cause significant detriment to the Australian economy and society.

“Although Australia has one of the strongest and most stable financial systems in the world, and failures are extremely rare, businesses in any competitive market can face financial difficulties,” he said.

“Should that happen, we want to be sure each entity has the capability to either recover, or manage an orderly exit with the smallest possible impact on the community and the financial system.”

The Customer Owned Banking Association (COBA) has embraced the reform, with chief executive Michael Lawrence stating it reflected the 2014 Financial System Inquiry’s recommendation to “reduce the perception that some banks may ‘be too big to fail’ due to an implicit government guarantee”.

“Any implicit guarantee from Australian taxpayers to the major banks gives them an unfair funding cost advantage over their smaller competitors and distorts competition,” Mr Lawrence said.

“Reducing unfair advantages for the biggest players in the market is good for competition and a more competitive market will benefit consumers.

“The decisions to reduce the perception of an implicit guarantee, and narrow the major banks’ advantages through the ‘unquestionably strong’ capital framework also released this week will allow for fairer competition across the banking sector.”

At the same time, the prudential regulator has begun consulting on new standards to build on how prepared banks, insurers and superannuation trustees are for future financial crises.

The two proposed standards entail one for financial contingency planning, to ensure entities have plans for responding to severe financial stress (to persevere or to exit the industry safely, while protecting customers) and one for resolution planning.

The second standard would require large or complex entities to take pre-emptive actions so that in the event of their failure, APRA can try to resolve them with limited impacts on the community and financial system.

It would include ensuring that critical financial services can continue to be provided with minimal disruption.

Further, APRA reported the first contingency planning standard will hold less onerous requirements for smaller entities, in line with their size, complexity and business models.

“APRA-regulated entities have made substantial improvements in contingency planning over recent years, however there remain large gaps in capabilities between entities and across industries,” Mr Lonsdale said.

“By laying out a consistent, transparent and enforceable framework, APRA will be better able to strengthen crisis preparedness and close those gaps.”

The two proposed prudential standards will undergo a five-month consultation, closing on 29 April 2022.

APRA has proposed for them to come into effect from 1 January 2024 and for superannuation trustees to have a delayed start for the financial contingency planning standard, one year after other banks and insurers.

The regulator will consult on supporting guidance material in 2022.

APRA’s steps around capital requirements have followed its new banking capital framework released last week, where it outlined that it would require more capital to be held against interest-only and investor loans.

The regulator had also aimed to support competition and to introduce simpler capital requirements for smaller banks, compared to their larger, more advanced rivals.

[Related: Banking association calls for ‘regulatory grid’]