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Australia – Final Report: Bank Funding, Prudential Regulation, And Disclosure.

10 December, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Banking & Finance

 

Australia’s prudential standards have been controversially amended to conform to post-GFC international norms, which some have argued are more stringent than those imposed overseas, and the Final Report has addressed this controversy.

 

While considering that ‘capital levels at Australia’s major banks … are likely to be above the global median but below the top quartile’, the Final Report has recommended bank capital requirements be set at ‘unquestionably strong’ levels in order to:

 

  • make banks less susceptible to extreme but plausible adverse events,
  • create a financial system that is more resilient to shocks and less prone to crises,
  • protect the government balance sheet from risks in the financial system, to minimise the burden on taxpayers and the costs to government and taxpayers of the perceived ‘implicit guarantee’ of bank liabilities.

 

In recommending ‘unquestionably strong’ capital standards, the first recommendation of the entire document, the Final Report has recommended:

 

  • an increase in the minimum capital required to be held by Australian banks to a level reflecting the top quartile of international comparisons, predominantly in the form of increased common equity tier 1 capital,
  • the introduction of a leverage ratio ‘that acts as a backstop to authorised deposit-taking institutions’ risk-weighted capital positions’,
  • the development of a loss absorbing and recapitalisation framework for ADIs, including the potential development of debt funding incorporating ‘bail in’ features, to reduce the cost of bank failures by establishing a framework through which failed banks may be more readily recapitalised, and
  • the development of a template by APRA to enable comparisons between the capital levels under Australian and international Basel frameworks.

 

The Inquiry has also recommended that internal ratings-based risk weighting of mortgages be increased to narrow the gap between those weightings and the weightings required under the standardised risk weighting approach. Although this narrowing of the gap is ostensibly driven by competition rather than capital adequacy concerns, the alternative of lowering the risk weighting required under the standardised risk weighting approach was not favoured due to its impact on capital adequacy and inconsistency with the minimum standardised weightings required under the Basel III framework.

 

Lastly, the Final Report recommended the prospective removal of the ability of superannuation funds to engage in direct borrowing for limited recourse borrowing arrangements.

 

Related:

 

1. ASIC Funding, Resources, And Powers

3. Consumer Outcomes For Product Issuers

4. General Advice Superannuation And Life Insurance

5. Innovation And Technological Change

 

herbert smith Freehills

 

For further information, please contact:


Michael Vrisakis, Partner, Herbert Smith Freehills

michael.vrisakis@hsf.com

 

Herbert Smith Freehills Banking & Finance Practice Profile in Australia

 

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