It’s going to be a rough day for bank investors after the key regulator, APRA released its briefing paper on its new rules for new capital buffers for all banks – rules that will force the banks large and small to raise billions of dollars in new capital – just as APRA did back in 2015.
The new buffers will be of sufficient size to justify the “unquestionably strong” description used by regulators to allow banks to survive for at least a month in the event of being shut out of global markets in a crisis.
News of the impending announcement from APRA saw the banks become the biggest drag on the market yesterday which fell 1.2% or 68 points for the ASX 200.
The Commonwealth Bank lost 1.9%, Westpac was off 1.7%, the ANZ slid 1.6% and National Australia Bank was down 1.8%. Around $6.7 billion was cut from the value of the big four yesterday – around a third of some estimates of how much new capital the banks will need to raise. In the document released this morning APRA said.
The four major Australian banks need to have CET1 capital ratios of at least 10.5 per cent to meet the ‘unquestionably strong’ benchmar
APRA will set prudential standards to achieve this outcome by effectively increasing requirements for all IRB banks (International ratings-based) by the equivalent of around 150 basis points
For other ADIs, the effective increase in capital requirements to meet the ‘unquestionably strong’ benchmark will be around 50 basis points
All ADIs are expected to meet the new benchmarks by 1 January 2020. (And ADI is an Authorised Deposit-taking Institution)
The deadline is a bit later than expected (sometime in 2019 was the previous suggested target).
The big four currently have capital ratios of more than 9% – the ANZ has a capital ratio of 9.9%, Westpac at 9.48%, NAB at 9.31% and CBA at 9.2%.
On that basis the banks might have to find between around $16 billion, maybe a bit more given they have yet to produce updated accounts to the end of June. the CBA will next month, so we will have a good idea how much money it will have to find.
The ANZ is proposing to raise around $4.5 billion in selling its wealth management business (or a share of it, which would produce a smaller return).
The two tier capital boosts reflects the greater importance of the big four banks, but all banks and financial groups taking deposits in Australia will have to find more capital – and that means the likes of the Bendigo Bank, Bank of Queensland, Me Bank, credit unions and mutuals and foreign banks in this country (such as ING) taking deposits will have to find more capital. There are around 187 ADIS in this country.
APRA Chairman Wayne Byres said: “APRA’s objective in establishing unquestionably strong capital requirements is to establish a banking system that can readily withstand periods of adversity without jeopardising its core function of financial intermediation for the Australian community.
“Today’s announcement is the culmination of nearly a decade’s financial reform work aimed at building capital strength in the financial system following the global financial crisis. Australia has a robust and profitable banking industry and APRA believes this latest capital strengthening can be achieved in an orderly way.
“Capital levels that are unquestionably strong will undoubtedly equip the Australian banking sector to better handle adversity in the future, and reduce the need for public sector support. However, a strong capital position still needs to be complemented by sound governance and risk management within ADIs, and on-going proactive supervision by APRA,” Mr Byres said in this morning’s statement.
