By Paulina Duran
SYDNEY (Reuters) – Australia’s banking regulator on Tuesday said it plans to ask lenders to meet higher capital levels domestically to offset their exposure to large overseas units – a move that comes in response to plans by New Zealand to hike capital ratios for the sector.
Australia’s Big Four banks own the largest lenders in New Zealand, which has proposed new capital ratios that would require the banks to raise NZ$20 billion ($12.6 billion) over the next five years.
The Australian Prudential Regulation Authority (APRA) said in a consultation paper it is proposing to limit the amount of exposure to a unit, which also includes domestic units, that a bank can leverage to 10% of common equity tier 1 (CET1) capital ratio.
Current rules allow the banks to leverage their investments in units, which may on average overstate their CET1 ratios by 100 basis points, APRA said. It argued the rule change was necessary to reduce the risk that Australian banks may not have sufficient capital to protect Australian depositors.
Some lenders may need to raise capital but there were also other options, it said.
“In relation to New Zealand, there are a number of options available to the banks. If they decide to fund any higher capital requirements by retaining local profits, they are unlikely to require additional capital domestically, APRA said in a statement.
Westpac Banking Corp
Australia and New Zealand Banking Group
National Australia Bank “This is a complicated proposal and is likely to take time for the market to fully digest,” Credit Suisse banking analysts told clients in a note. “It is a net-negative for the sector …(but) we acknowledge there are some offsetting measures that may mean the impact is less than the 100bp headline.” The proposals are open to submissions from the lenders and interested parties until Jan. 31. The regulator intends to finalize the changes in early 2020 with the new requirements expected to come into force from Jan. 1, 2021. APRA is also proposing a reduction in the capital that banks must hold to offset exposure to smaller banking or insurance units.
(Reporting by Paulina Duran in Sydney; Additional reporting by Ambar Warrick in Bengaluru; Editing by Edwina Gibbs)