APRA releases changes to Mutual Equity Interests capital for mutual ADIs

The Australian Prudential Regulation Authority (APRA) has released its final Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111) containing changes to the Mutual Equity Interests capital framework for mutually owned authorised deposit-taking institutions (ADIs) to provide these ADIs with more flexibility in their capital management. The revised prudential standard APS111 will come into effect from 1 January 2018.

Facilitating the ability of mutually owned ADIs to directly issue Common Equity Tier 1 (CET1) capital instruments was the first recommendation of the recent Independent Facilitator Review into the mutual ADI sector .

Mutual equity interests

The Mutual Equity Interest (MEI) framework for mutually owned ADIs allows mutually owned ADIs to issue CET1-eligible capital instruments directly without jeopardising their mutual status.

However APRA has imposed certain limitations including:

  • APRA has decided to limit the Mutual Equity Interests to 25 per cent of CET1 capital;
  • to appropriately reflect the equity nature of MEIs and the discretionary nature of all distributions, any reference to determining distributions by reference to a benchmark or index must be illustrative only;
  • APRA is retaining the overall limit on distributions of 50 per cent of an issuing ADI’s net profit after tax (before distributions are paid) in the financial year to which the distributions relate;
  • As MEIs are new and untested, APRA remains of the view that they should be subject to prior approval. An ADI needs to submit to APRA an independent legal opinion on an instrument’s eligibility under the prudential framework and other matters.
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