For the effective functioning of an economy the services of Financial institutions are very important and no matter how careful these institutions are, there is always a possibility of failure. In events of the global financial crisis, the failures of Financial institutions can have broader impact on the financial system and it could lead to more severe social and economic consequences. To avoid these mishappenings, the Australian Government has asked Australian Prudential Regulation Authority (APRA) to implement a framework for Australian Banks in order to support the orderly resolution in the unlikely event of failure and protect the economy from any Financial shock.
APRA is the prudential regulator of the financial services industry and it has recently released a discussion paper on its website in which it has proposed changes to the application of the capital adequacy framework for authorized deposit-taking institutions (ADIs) to support orderly resolution in the unlikely event of failure which means that APRA wants to raise the amount of spare cash banks carry to withstand any future financial shock. According to the discussion paper, APRA wants the country’s four biggest banks to raise their available capital by four to five percentage points by the year 2023, from the current 14.5 percent. Commonwealth Bank of Australia, Westpac, ANZ and National Australia Bank are the four big banks of Australia and currently they hold combined market share of more than 80 percent.
As per the discussion paper of APRA, the extra capital will bring the Australian banks in line with new international standards developed by the Basel Committee on Banking Supervision and adopted by Canada and European Union countries. As per APRA’s Chairman Mr. Wayne Byers, the aim of these proposals and resolution planning more broadly is to ensure that the failure of a financial institution can be resolved in an orderly fashion.
Source – APRA Website, Discussion Paper released on 8 November 2018.
Australia’s fourth-largest bank by market value, National Australia Bank Ltd (ASX: NAB) today noted the release by APRA and announced that based on NAB’s risk-weighted assets (RWA) of $390 billion at 30 September 2018, it would require an incremental increase of $16bn to $19bn of total Capital, with a corresponding decrease in senior debt issuance. Westpac Banking Corporation (ASX: WBC) also made an announcement stating that based on its risk-weighted assets of $425 billion at September 30, it will require an amount of around $17 billion to $21 billion of total capital, with a corresponding decrease in other forms of funding. Westpac shares rose by 1.84 percent on ASX.
ANZ also announced that based on ANZ’s RWA of $391bn as at 30 September 2018, it will need an incremental increase in the total Capital requirement of approximately $16 billion to $20 billion, with an equivalent decrease in other senior funding. ANZ’s shares uplifted by 2.268 percent on ASX. Commonwealth Bank of Australia (ASX: CBA) announced that based on CBA’s RWA of $461 billion as at 30 September 2018, it requires an incremental increase of approximately $18 billion to $23 billion of Total Capital. Further, the bank is expecting that this requirement would result in a decrease in other forms of funding. CBA’s shares rose by 1.831 percent as on 8 November 2018.
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