APRA weighs-in on bail-outs for Australian banks

Ian Rogers Finance regulation

How convincingly has APRA’s latest guidance on increasing capital “to support orderly resolution” of troubled banks in Australia clarified entrenched positions on the inevitability of political weakness in the face of the “Too big to fail problem”?  

And how much progress has been made towards “reducing any implicit government guarantee” - the 2015 policy of John Howard’s government in response to the 2014 FSI Report?

In an eight-page advisory yesterday on loss-absorbing capacity, APRA’s deputy chair John Lonsdale wrote that “while government recapitalisation can be an important tool where needed, it shifts the financial burden onto taxpayers. To reduce the need for public funds when financial institutions fail, APRA has sought to bolster the amount of private funds available to support an orderly resolution.”

So what’s really different?

S&P Global Ratings, in a consistent analysis, yesterday declared that “we believe that this plan does not introduce any policy or process impediments to the government bailing out a systemically important bank, in the unlikely event this was required.

“Nor does it suggest any diminution in the Australian authorities' willingness to do so.”

Frank Mirenzi, vice president of Moody's Investors Service told Banking Day “there remains a reluctance to implement a full statutory resolution regime and there remains a role for public funds in resolving a failing bank, as identified by APRA in its November 2018 discussion paper.

 “Consequently, our view of the potential for government support for bank for depositors and senior bondholders has not changed.”

Declining to propose any nifty “new instrument that would rank ahead of regulatory capital”, APRA took the high road of being dragged into any facile debate over “bail-ins”, which are common in other countries.

APRA does not have a statutory power to write-off or convert the interests of creditors, it explained.

“Expanding APRA’s powers to allow for a statutory bail-in approach would require legislative change, which is ultimately a consideration for government and would need to go through the parliamentary process to be implemented.

“Pursuing this approach would raise significant policy trade-offs for government to consider, including determining the scope of such a power, the associated effect on credit ratings, impact on funding costs and ultimately the economy.”

APRA accepted that some submissions “suggested that a new instrument be introduced, with similar features to instruments in other jurisdictions designed to meet the Financial Stability Board’s Total Loss-Absorbing Capacity standard. Such instruments are generally subject to statutory powers to impose losses in resolution and are subordinated to liabilities needed to maintain critical functions.

“Submissions argued that a new instrument would attract a larger pool of investors. Options proposed included adopting a statutory bail-in approach or introducing an instrument with contractual clauses to affect loss absorption.”

Given the legislative change needed to give it power to allow for a statutory bail-in approach, APRA argued there were features of the proposed contractual instrument that were inconsistent with ensuring APRA’s objectives in resolution could be met.

Those features include a later trigger point than regulatory capital, no subordination to senior creditors and the absence of the ability to write off the instrument.