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Connexus : Issue 43
The Customer Owned Banking Association is working with the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission to develop capacity in the regulatory framework for customer-owned banking institutions to issue Basel III-compliant capital instruments that are consistent with mutuality. APRA has bedded down the Basel III capital framework for listed authorised deposit-taking institutions, but ar riving at a solution for mutual ADIs has taken longer than expected. The Basel III liquidity framework was expected to be fnalised by mid-2013, with the new prudential standard on liquidity to commence on 1 January 2014. Mutual capital instruments APRA and ASIC are consulting with the association and its members on the principal characteristics of a Common Equity Tier 1 capital instrument that a mutual ADI could issue as a result of the conversion of an Additional Tier 1 or Tier 2 instrument in a 'trigger' event, such as APRA declaring the ADI non-viable. The only alternative to conversion to CET1 is immediate and total write-off. Once agreement has been reached between the regulators and the association, APRA's intention was to publicly announce and consult on any proposed amendments to the prudential standards to accommodate the mutual capital-raising options. Liquidity standard APRA made some welcome changes to its proposed reforms of the Minimum Liquidity Holdings framework, in response to submissions from the association and its members. However, in its Response to Submissions on liquidity reform, APR A was reluctant to spell out when a large MLH ADI would be expected to move to the more sophisticated scenario analysis framework. "MLH ADIs have differing business strategies, funding structures, access to liquidity, balance sheet size and complexity," according to APRA. "It is not possible to provide a comprehensive list of attributes that would appropriately cover all MLH ADIs or distinguish scenario analysis candidates. "The nature and timeframe of a transition path for an individual ADI is appropriately worked out with an ADI's responsible super visor and will follow a tailored prudential super visory plan." APRA says. In APRA's revised consultation package for MLH ADIs: • An earlier proposal for a 20 per cent cap on lower-rated assets was removed and "APR A accepts that a hard limit in this area may be unnecessarily prescriptive". • APS 210 has been amended to exclude CUFSS obligations from the liability base for the purposes of calculating the MLH ratio. • APR A has acknowledged competitive neutrality concerns regarding the different treatment of residential mortgage-backed securities for liquidity holdings of MLH ADIs compared to large banks and has stated that the existence of self-securitisation arrangements by MLH ADIs "will continue to be a signifcant input to APRA’s super visory assessment of the adequacy of an ADI's liquidity management framework". The proposed new APS 210 also includes a number of new qualitative requirements which will apply to all ADIs, including more elaborate board and senior management responsibilities for liquidity management. The main elements of the global Basel III liquidity reforms -- the Liquidity Coverage Ratio and the Net Stable Funding Ratio -- will not apply to MLH ADIs. However, these changes will have an indirect impact on MLH ADIs due to their effect on supply and demand for certain assets and liabilities. Luke Lawler is the Customer Owned Banking Association senior manager, public a airs. APRA has made some welcome changes to its proposed Minimum Liquidity Holdings framework... Fine-tuning Basel III With a new liquidity framework due to begin in five months, the regulators are continuing to work with the customer-owned banking sector on capital instruments. BY LUKE LAWLER NEWS www.customerownedbanking.asn.au 15