Captured APRA waters down bank capital framework

The Australian Prudential Regulatory Authority (APRA) has caved-in yet again, delaying proposed bank capital reforms:

The big four banks will have longer than expected to raise extra capital to absorb potential losses after the prudential regulator amended its proposed framework for minimising the fallout from failed institutions.

The Australian Prudential Regulation Authority on Tuesday said the majors had to lift total capital by three percentage points of risk-weighted assets by 2024, putting away what the regulator estimates will be another $50 billion to minimise the need for taxpayer funds should they collapse.

APRA had flagged a four-to-five percentage-point increase in an initial proposal published in November but amended the timeline following submissions from parties including the Customer Owned Banking Association.

APRA said its long-term target of a four to five percentage-point increase remained unchanged.

“The global financial crisis highlighted examples overseas where taxpayers had to bail out large banks due to a lack of residual financial capacity,” APRA deputy chair John Lonsdale said.

“Boosting loss-absorbing capacity enhances the safety of the financial system by increasing the financial resources that an ADI (authorised deposit-taking institution) holds for the purpose of orderly resolution and the stabilisation of critical functions in the unlikely event that it fails.”

The UK and US governments had to pump cash into struggling lenders amid the global financial crisis because the impact of them going under outweighed the cost of shoring them up.

APRA’s move on capital is designed to minimise the need for similar taxpayer-funded support in what the regulator called the “unlikely” event of failure.

Over recent months we’ve witnessed similar watering down by APRA.

As we know, APRA has removed its mortgage buffer, thus allowing banks to expand mortgage lending. APRA has also recently abandoned reforms to increase bank capital to “unquestionably strong” benchmarks, and announced that it would lower the mortgage risk weight by 10 basis points for smaller ADIs,

It’s amazing that only months after the Hayne Royal Commission found the banks guilty of irresponsible lending that Australia’s prudential regulator can dilute its framework. It also stands in stark contrast to the regulatory reforms of the RBNZ.

APRA has clearly been corrupted.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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