The Australian Prudential Regulation Authority has responded to the recent move by its New Zealand counterpart to boost banks' capital adequacy and will increase capital requirements for authorised deposit-taking institutions with banking and insurance subsidiaries.APRA is proposing to increase the capital ADIs must hold to offset concentrated exposures to domestic and foreign banking and insurance subsidiaries.APRA said it did not expect that additional capital would be required at an "aggregate industry level" but individual ADIs may need to raise capital.APRA said its approach was, in part, shaped by the Reserve bank of New Zealand's proposal for New Zealand banks to lift their regulatory capital.It said it was in dialogue with the RBNZ over their respective plans to strengthen the resilience of their financial systems.It is proposing to increase the amount of equity required to support investments in large subsidiaries and reduce that for smaller subsidiaries. Some ADIs would gain a capital benefit."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," APRA said.APRA is proposing to limit the amount of the exposure to an individual subsidiary that can be leveraged at 10 per cent of an ADI's CET1 capital. Amounts over the 10 per cent threshold would be required to be met dollar-for-dollar by the ADI parent company.Amounts under the 10 per cent threshold would be risk weighted at 250 per cent and included as part of the related party limits.Westpac said in a statement that there was no impact from the proposal on the calculation of its reported regulatory capital on a Level 2 basis, which is the key ratio commonly reported. The proposal would reduce its Level 1 CET 1 capital ratio by approximately 40 bps (around A$1.6 billion).At June 30, Westpac's Level 1 CET1 capital ratio was 10.5 per cent. Since then it has taken action to life its Level 1 CET1 by around 25 to 30 bps through intra-group transactions.Commonwealth Bank said that, based on its current equity investments and assuming the RBNZ's capital proposals require CBA to add about NZ$3 billion of additional capital into ASB Bank, the proposals would reduce CBA's CET1 ratio by about 30 basis points.NAB said that under the proposed standard there would be minimal impact on its Level 1 CET1 ratio and its Level 2 CET1 ratio would be unchanged.ANZ said APRA's proposal provides a capital benefit for investments in small subsidiaries, such as those that ANZ has in China, Indonesia, Papua New Guinea and Thailand. The proposal has a negative impact for large subsidiaries, such as ANZ's New Zealand business.The bank said: "The net impact for the group is unclear and will depend on a number of factors, including the capitalization of all its subsidiaries at the time of implementation."Based on the bank's investment at June 30, the APRA proposals imply a reduction in ANZ's Level 1 CET1 capital ratio of 75 bps (around $2.45 billion)."However, ANZ believes