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Connexus : Issue 40
Mutual recognition sought in Basel III APRA called on to accept the Basel Committee's nod to "tailor" capital rules. BY LUKE LAWLER Mutual banking institutions are seeking some 'tailoring' by the Australian Prudential Regulation Authority of the Basel III capital reforms to accommodate the customer-owned business model. Basel III tightens defnitions of regulatory capital in the categories of Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) and Tier 2 (T2). Mutuals need to be able to issue qualifying capital instruments to broaden their regulatory capital beyond retained earnings. APR A has given a public commitment to work closely with mutual authorised deposit-taking institutions on the particular challenges that the Basel III measures on the quality of capital pose for the mutual sector. The key issues are the criteria for CET1 'ordinary shares' and the application of the non-viability principle that also can be tailored to the context of non-joint stock companies to ensure they hold comparable levels of high quality Tier 1 capital." Distinction between mutual and listed ADIs Non-joint stock companies in the Australian market are mutual ADIs -- credit unions, building societies and mutual banks. As APRA recognises, mutual ADIs can be distinguished from other ADIs by their adherence to the mutual corporate structure in accordance with ASIC's Regulatory Guide 147 Mutuality -- Financial institutions. This defnition provides the opportunity for a clear distinction between mutual ADIs and listed ADIs in the prudential standards. "The pr udential regulatory framework already takes account of the differences between ADIs in ter ms of size, complexity and risk profle,” Abacus says in a recent submission to APRA. "Although the Basel III capital reforms are global minimum requirements for internationally active banks, Abacus does not seek exemption from the framework for Australian mutual ADIs. We seek application of the framework taking into account the mutual model, as is expressly permitted by the Basel Committee. "It is unacceptable to the mutual ADI sector to be required to demutualise to gain access to external capital. "Capacity to access external capital is a pr udential beneft per se, but also enables mutual ADIs to more fexibly manage and grow their balance sheets to ser ve their members' interests," the Abacus submission says. Luke Lawler is senior manager – public afairs at Abacus. for mutual AT1 and T2 instruments. Abacus and its member ADIs are working with APRA on options for mutual CET1 instruments and mutual AT1 and T2 instruments with an alternative to conversion into listed equity or write-off at the point of non-viability. The Basel Committee's Basel III: A global regulatory framework for more resilient banks and banking systems says: "...the predominant form of Tier 1 capital must be common shares and retained earnings. This standard is reinforced through a set of principles It is unacceptable to the mutual ADI sector to be required to demutualise to gain access to external capital. 12 Connexus NEWS