Smaller lenders call on APRA to close the big four funding gap

The customer-owned banking sector wants APRA to use new capital requirements to cut a big four funding advantage.

The customer-owned banking sector has urged its regulator to use new capital requirements to close the gap on a funding advantage held by the big four, while not allowing the proposals to flood the bond market with new issues.

In a submission to the Australian Prudential Regulation Authority, the $116 billion customer-owned bank industry argues the “too big to fail” funding advantage should be addressed to help smaller lenders compete against the big banks.

It also urges the regulator to ensure the new reforms don’t “flood the market” with subordinated debt securities, which would disrupt pricing for all banks in that part of the bond market.

APRA’s proposed changes — outlined in November — would see banks boost their capital buffers by up to 5 percentage points to limit taxpayer bailouts in the event of a bank collapse.

But the proposed rules have already spurred some criticism from the big four banks, which estimate they would need to issue $75 billion in tier-two bonds between them to meet the requirements. That amount is expected to increase bank funding costs and prompt a wave of new bond issues.

Tier-two bonds are a form of subordinated debt that are less risky than shares and hybrid or tier-one securities in the banks’ capital structure. “APRA has a golden opportunity to kill two birds with one stone: increase the amount of capital held by Australian banks while improving competition in the banking sector,” Customer Owned Banking Association (COBA) chief Michael Lawrence told The Australian.

“The big four have reaped the rewards of the implicit guarantee of ‘too big to fail’ for decades. It’s made wholesale funding cheaper for the big four, which has gifted them an unfair advantage over challenger banks.” The APRA discussion paper outlines the increase in the major banks’ tier-two buffer, which would take full effect from 2023 after being formalised late this year.

The paper said there was likely to be “no adjustment” for smaller banks, although a limited number could be required to maintain additional capital.

COBA, which represents credit unions, mutual banks and building societies, said in its submission that APRA should broaden its proposal to include tier-one capital for the major banks.

“COBA suggests a number of important objectives would be more effectively achieved if APRA modifies its proposed framework to require around one-third of the additional TLAC (total loss absorbing) capital to be tier-one capital,” it said.

The industry body believes its suggested model would increase the amount of the higher quality capital in the banking system, ­reduce the largest banks’ funding cost advantage and minimise disruption to the tier-two bond market.

“Customer-owned banking institutions need an opportunity to take on the big four on a level playing field,” Mr Lawrence said.

“By getting the big four to hold a greater amount of tier-one capital, APRA can help instil greater competition in Australian banking.”

A COBA-commissioned assessment estimated the big banks enjoy a funding advantage of $2.9bn-$4.5bn a year.

APRA’s proposed changes come after the landmark 2014 Financial System Inquiry recommended the regulator implement a framework for minimum loss-absorbing and recapitalisation capacity that aligned with emerging global practice.

APRA is trawling through feedback from stakeholders who were asked to address six key questions before formalising its position on the new rules. They are separate to its “unquestionably strong” capital requirements, which come into force by 2020 and mandate the large banks to hold common equity tier-one capital of 10.5 per cent.