S&P Global Ratings weighs in on APRA's proposed bank capital framework reforms
S&P Global Ratings has expressed concerns that a recent proposal to phase out banks’ additional tier 1 (AT1) capital instruments in Australia could weaken the capital positions of major banks.
The Australian Prudential Regulation Authority (APRA) introduced the proposal as a way to reduce risks associated with high retail investor exposure to AT1 instruments. While this may help address systemic risks, S&P noted that it could negatively impact the ratings of banks' tier 2 (T2) instruments.
S&P said the ratings on existing AT1 instruments could face mixed pressures depending on the details of APRA’s final decision and banks’ responses to the new framework. The credit rating agency emphasised that any rating adjustments would depend on further clarity regarding the regulatory changes.
If implemented, Australia would be the only developed banking system without a framework for hybrid instruments, such as AT1 securities, within tier 1 capital.
“In our view, APRA’s proposal is unlikely to be widely replicated,” said Sharad Jain (pictured above), credit analyst at S&P Global Ratings. “We think that AT1 instruments can play a role in absorbing losses and conserving cash on a going-concern basis, and recapitalising or resolving a bank that is no longer viable. Also, most other countries do not have such high exposure of retail investor to AT1 securities as Australia.”
APRA’s proposal follows global banking turbulence last year, which saw several banks in the US and Europe collapse or require government bailouts. The Australian regulator’s changes are aimed at simplifying the capital structure and reducing risk, while maintaining the strength of banks’ capital buffers.
The overall regulatory capital requirements for Australian banks would remain unchanged under APRA’s proposal, with banks continuing to meet the “unquestionably strong” standard. However, banks would need to transition away from AT1 capital, typically used to absorb losses before a bank becomes insolvent.
S&P’s analysis suggests that while the regulatory shift may enhance financial stability, it could present challenges for banks as they adjust to the new requirements.
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