Banking (prudential standard) determination No. 1 of 2014

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

                                      Banking Act 1959, section 11AF

Under  subsection 11AF(1) of the Banking Act 1959 (the Act), APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised NOHCs). Under subsection 11AF(3) of the Act, APRA may, in writing, vary or revoke a prudential standard.

On 8 April 2014, APRA made Banking (prudential standard) determination No 1of 2014 (the instrument) which revokes Prudential Standard APS 111 Capital Adequacy: Measurement of Capital made under Banking (prudential standard) determination No. 4 of 2012 and determines Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111).

The instrument commences upon the date of registration of this instrument on the Federal Register of Legislative Instruments.

1. Background

APRA’s mandate is to ensure the safety and soundness of prudentially regulated ADIs so that they can meet their financial promises to depositors within a stable, efficient and competitive financial system. A core element in this process is addressing the capital adequacy of ADIs to cover the risk of their operations.

The Basel Committee on Banking Supervision (BCBS) has developed a series of frameworks for measuring the capital adequacy of internationally active banks.  Following the financial crisis of 2007-2009, the BCBS amended its capital framework so that banks hold more and higher quality capital (Basel III). For this purpose, the BCBS established in Basel III more detailed criteria for the forms of eligible capital, Common Equity Tier 1 (CET1), Additional Tier 1(AT1) and Tier 2 (T2), which banks would need to hold in order to meet required minimum capital holdings.

Basel III provides that AT1 and T2 capital instruments must be written-off or converted to ordinary shares if relevant loss absorption or non-viability provisions are triggered.  

Banking (prudential standard) determination No. 4 of 2012 incorporated the Basel III developments into APS 111 with effect from 1 January 2013.  The instrument makes further changes to APS 111 to address impediments to mutually owned ADIs that are unable to issue AT1 and T2 capital instruments that convert into ordinary shares under the loss absorption or non-viability provisions in APS 111. The corporate structure of mutually owned ADIs does not permit the issue of ordinary shares.      

 2 Purpose of the instrument

The purpose of the instrument is to revoke APS 111 and replace it with a new version.

APS 111 aims to ensure that an ADI maintains adequate levels of appropriate quality capital to meet its risk exposures. The key changes are to:

• provide that mutual equity interests issued by mutually owned ADIs arising from conversion of AT1 or T2 capital instruments following a loss absorption or non-viability event qualify as CET1 capital; and
•  establish a set of criteria which mutual equity interests issued by a mutually owned ADI need to satisfy in order to qualify as CET1 capital.

3. Consultation

In October 2013, APRA issued for public comment a draft of APS 111 setting out proposed changes in relation to recognition of mutual equity interests. In addition, APRA undertook extensive consultation with the Customer Owned Banking Association (COBA) on the drafting of the proposed amendments. APRA also received input from the Australian Securities and Investments Commission (ASIC) on the interplay between proposed changes to APS 111 and the provisions in Part 5 of Schedule 4 of the Corporations Act 2001 and ASIC Regulatory Guide 147 Mutuality – Financial Institutions.

4.   Regulation Impact Statement

The Office of Best Practice Regulation has advised that a Regulation Impact Statement is not required for this legislative instrument.

5. Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

A Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at Attachment A to this Explanatory Statement.

Attachment A

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Banking Act (prudential standard) determination No.1 of 2014

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).

Overview of the Legislative Instrument

The instrument revokes Prudential Standard APS 111 Capital Adequacy: Measurement of Capital made under the Banking Act (prudential standard) determination No. 4 of 2012 and determines a new Prudential Standard APS 111 Capital Adequacy: Measurement of Capital 111.  APS 111 sets out the characteristics that an instrument must have to qualify as regulatory capital for an authorised deposit-taking institution (ADI) and the various regulatory adjustments to be made to determine the total regulatory capital of the ADI.

Human rights implications

APRA has assessed the instrument and is of the view that it does not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the HRPS Act. Accordingly, in APRA’s assessment, the instrument is compatible with human rights.

Conclusion

The Legislative Instrument is compatible with human rights as it does not raise any human rights issues.