Australian Banks: Relief From Across The Ditch

Australia | Dec 09 2019

After a year's consultation, the RBNZ has released additional capital requirements for Australian banks that are not as onerous as feared.

-Lower than feared CET1 requirement
-Longer compliance period
-Capital raising not likely
-Dividend cuts cannot be ruled out

By Greg Peel

If the GFC brought one thing, it was the realisation global "big" banks were not carrying enough capital against the risk they were holding on their balance sheets. So began a lengthy process of tightening regulations while awaiting the outcome of a globally coordinated review that would result in a set of "Basel IV" regulations.

The Australian Prudential Regulation Authority told the big Australian banks it would take on board the Basel recommendations and then add an additional capital buffer to compensate for the fact Australia's "too big to fail" banks operated in a relatively small economy. APRA would require our banks to be "unquestionably strong".

No one knew what that meant.

As it was, the Basel negotiations went on and on and eventually ended in stalemate, so APRA decided it better go ahead with "unquestionably strong" anyway, which turned out to be a requirement that 10.5% of bank capital must be common equity tier one (CET1).

APRA has also since tightened other capital measures with regard to risk-weighted assets and offshore subsidiaries but at the time analysts suggested the Big Four could reach their required capital levels in a dawdle by the January 1, 2020 deadline.

Of course we've since seen the Royal Commission put bank balance sheets under tremendous pressure which, at the recent earnings season, forced changes to dividend policy and a capital raising. But even then, it appeared the CET1 requirement would still be readily achievable.

Except that, in between, the Reserve Bank of New Zealand decided it wanted an even bigger buffer for its own "too big to fail banks" than APRA's 10.5%, which itself was always planned to be greater than whatever Basel came up with. Indeed, as much as 16%.

This was the initial proposal, before the RBNZ began a year-long consultation. The problem for Australia's TBTF banks is that they are also New Zealand's TBTF banks. The Big Four here are the Big Four there, ahead of smaller domestic players.

All the Big Four needed at this difficult time was yet another capital requirement increase, further risking dividends and perhaps forcing more capital raisings.

The hope was the RBNZ would not find it necessary to go all the way to 16%.

But it did.

Not So Bad

However, last week's announcement was not as bad as feared. Yes, the total capital requirement would be 16% but this would be made up of 13.5% CET1 and 2.5% additional tier one (AT1) capital, which means hybrid debt/equity issuance. The initially proposed split here was 14.5% and 1.5%.

And instead of having five years to comply from the 2018 date, implying 2023, the RBNZ is allowing seven years from 2020, to July 2027. Plenty of time, analysts suggest, for the banks to work towards achieving their requirements.

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