The Bull

Wednesday 16

January, 201911:19 PM



Big banks push APRA to reconsider Tier II funding

Big banks push APRA to reconsider Tier II funding

The major Australian banks have been fairly willing to comply with almost all recent moves by regulators and legislators to implement more control in the finance industry in the wake of the Royal Commission inquiry.

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By Oliver King 14.01.2019

The major Australian banks have been fairly willing to comply with almost all recent moves by regulators and legislators to implement more control in the finance industry in the wake of the Royal Commission inquiry.

However, the banks are pushing back on some key issues, one of which emerged this week against the Australian Prudential Regulation Authority (APRA), which has raised the amount of capital that banks must have available in Tier II funding to be considered too big to collapse.

This means that all major banks now need to fund an additional $75bn worth of Tier II bonds if they are to reach the level needed for bailing out in the event of a financial crash. The way that current headlines are looking, this could be looming sooner rather than later.

The banks are asking APRA to reconsider its proposal on the basis that there is not enough of a market worldwide to undertake this kind of capital restructuring. They claim that the regulator is pushing for 7% of their risk-based assets to comprise this debt and that following this rule is an unfair expectation given the state of the current financial markets.

The collective bank response is part of the consultation that APRA is currently holding on the process, which they have been developing since November. At the time, the regulator said that it was necessary to deal with a worldwide initiative for "total loss absorbing capital" as central banks look to undertake a series of restraints that will make world markets more resilient to financial crashes such as the one in 2008, which led to mass recessions.

As soon APRA's paper became public at the end of last year, there was a flood of spread funds on Tier II bonds, which reduced their price across the board. This made them worth less than other forms of debt that Australian banks were able to hold.

A median estimate shows that this change would see the banks tripling the debt class of this type compared to the last few years, going from $25bn to between $67bn and $83bn. In addition, a large chunk of this debt, standing between $15bn and $20bn, needs refinancing before 2023, so there is plenty of work to do if the banks are to fall in line with APRA’s wishes.

Tier II bonds are expensive to raise in the first place, as they receive priority in terms of servicing ahead of Tier I bonds and protect depositors and those holding senior bonds against any losses that may arise.

Some fear that if the major banks have to chase more of this debt type, then they will need to acquire more of it from overseas to comply with demand. This will stoke the lending rates higher, which will then pass costs onto households.

Westpac Treasurer Curt Zuber said that he supported APRA's idea in terms of shoring up accounts and investments in case of a crash. However, he added that the proposal will be difficult to carry out because the global market is shifting away from the use of Tier II bonds. It appears that the banks and the regulator are going to remain at odds on the issue unless they can reach a compromise.

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