Australia's banking regulator flags higher capital requirements

SYDNEY (Reuters) - Australia’s bank regulator said on Thursday it wants to raise the amount of spare capital banks must carry, its third such request in three years, heaping pressure on companies already bracing for tightened regulation.

The Australian Prudential Regulation Authority (APRA) wants the country’s four biggest lenders to raise their available capital by 4 to 5 percentage points by 2023 from the current 14.5 percent of total risk-weighted assets, according to a discussion paper on its website.

That would require Australia’s “Big Four’ largest banks to raise between A$67 billion and A$83 billion in extra capital over four years, they said in separate statements to the stock exchange.

APRA has already ordered the big banks to boost capital twice since 2015 as it seeks to barricade the sector against global shocks.

The extra capital buffer would bring Australian banks in line with new international standards developed by the Basel Committee on Banking Supervision and adopted by Canada and European Union countries, it said.

National Australia Bank Ltd NAB.AX, Australia's fourth-largest bank by market value, said it would need to increase its capital by up to A$19 billion ($13.8 billion) and issue less senior debt, to meet the latest requirement.

Westpac Banking Corp WBC.AX said it would need to increase its capital by up to A$21 billion, with corresponding reductions in other forms of funding.

ANZ Banking Group Ltd ANZ.AX would need to raise up to A$20 billion in extra capital, and Commonwealth Bank of Australia CBA.AX between A$18 billion to A$23 billion.

The four lenders hold a combined market share of more than 80 percent, raising fears a bank failure could gravely damage the broader economy.

“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,” APRA Chairman Wayne Byers said in a statement.

APRA said banks could use any form of capital to meet the higher requirements. It anticipated most of increased buffer would be Tier 2 subordinated debt capital.

“This may dramatically alter the supply/demand dynamic and take the Tier 2 market pricing into uncharted territory,” Brendan Sproules, a banking analyst at Citigroup said. Subordinated debt stands to be repaid only after the senior debts of a company have been paid, in the event of a liquidation.

While the regulator does not expect banks would need to raise rates as a result of the new requirement, Sproules said banks would be likely to assess and pass on the ultimate cost to customers.

Ratings agency S&P Global said that if implemented, the APRA plan to increase the banks’ loss-absorbtion capacity would trigger an upgrade in its rating outlook on the Big Four to “stable” from “negative”.

The proposed new rule comes as Australia’s major banks prepare for tighter regulation after a public inquiry exposed widespread misconduct in the financial industry.

Billions of dollars have been knocked from their market capitalization in the wake of the revelations, as investors price in an anticipated tightening of regulations.

APRA is seeking industry feedback before the proposals are implemented.

Reporting by Tom Westbrook and Paulina Duran in Sydney; Editing by Stephen Coates and Eric Meijer