Investor tolerance for nifty, “loss-absorbing” debt instruments will be tested by APRA’s final conclusions on reforming capital measures for Australian banks.
“Our work on building loss-absorbing recapitalisation capacity to deal with a bank failure or near-failure has been moving on a very different timeline to risk-based capital, and deliberately so,” said Pat Brennan, APRA’s executive general manager for policy, at an industry event yesterday.
In November last year, APRA released a discussion paper on loss-absorbing capacity of authorised deposit-taking institutions.
Brennan said that “in this paper we proposed increasing the Total Capital Requirement of the major banks by between 4 and 5 per cent of risk-weighted assets, with the expectation this would be mostly met through the increased issuance of Tier 2 instruments.
“APRA intentionally proposed a simple approach of using existing, well-understood capital instruments, given they have been proven to work for their intended purpose – that is they recapitalise a bank when needed,” he said.
Summarising feedback so far, Brennan said “the response we have received has been somewhat mixed.
“We have been given clear feedback in a number of submissions that the quantum of Tier 2 targeted, particularly at the higher end of the calibration range consulted on, will test the likely bounds of investor capacity. Submissions therefore challenged whether that calibration is sustainable over time given debt markets will continue to experience occasional periods of difficult issuance conditions.
“Some submissions also questioned whether there are lower cost options to achieve the same level of recapitalisation capacity, accepting these options are more complex.
“On the other hand we have also received feedback from some parties that using existing, proven capital instruments is a very good idea.”
Pat Brennan spoke at the KangaNews Debt Capital Markets Summit in Sydney.