The Australian Prudential Regulation Authority (APRA) has released its response about the capital adequacy framework of the ASX banks including National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC).
APRA’s Capital Adequacy Framework
APRA released a discussion paper in November 2018 proposing that the big four Australian banks be required to increase their total capital by four to five percentage points of ‘risk weighted assets’ (RWA) over four years.
The regulator was thinking that the banks would use ‘Tier 2’ capital to reach most of this requirement. The changes would improve the financial resources available to APRA to resolve an issue with a failing authorised deposit-taking institution (ADI) and hopefully mean that taxpayer support is not needed, or at least minimal.
However, the problem for APRA and the big banks is that there probably isn’t enough market demand to absorb an extra four to five per cent of RWA in Tier 2 capital from the big banks, and it could increase the costs of the big banks too much.
What’s The New APRA Plan?
Instead, APRA will require the major banks to lift their total capital by three percentage points of RWA by 1 January 2024. APRA’s overall long term target of an additional four to five percentage points of loss absorbing capacity remains unchanged.
APRA Deputy Chair John Lonsdale said: ““The global financial crisis highlighted examples overseas where taxpayers had to bail out large banks due to a lack of residual financial capacity.
Boosting loss-absorbing capacity enhances the safety of the financial system by increasing the financial resources that an ADI holds for the purpose of orderly resolution and the stabilisation of critical functions in the unlikely event that it fails.”
Are The Big Banks Are A Buy?
The big banks only have to increase total capital by three percentage points by 2024 instead of four to five over four years, giving the banks more time and space to reach the required safety level.
It’s good that banks will be safer overall, but I think investors need to be careful about the price they buy banks at and the potential damage that bad debts could cause to the profit. I’d much rather buy shares of reliable businesses like the ones in the free report below instead.
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