Regulatory capital for mutuals under Basel III

APRA has set out its proposals for regulatory capital for ADI’s under Basel III in a discussion paper.

APRA proposes to adopt the Basel III definition of regulatory capital, under which common equity (ordinary shares) is the predominant form of Tier 1 capital.

APRA proposes that, from 1 January 2013, all ADIs will be required to meet the following minimum requirements:
• a 4.5 per cent Common Equity Tier 1 ratio (increased from 2%);
• a 6.0 per cent Tier 1 capital ratio (increased from 4%); and
• an 8.0 per cent Total Capital ratio (no change) .

A capital buffer of an additional 2.5% of Common Equity Tier 1 will also be required resulting in a minimum of 7% Common Equity Tier 1.

In respect of mutual ADIs APRA says:

The criteria for classification as common shares in Common Equity Tier 1 is intended to apply to all ADIs, including mutually owned ADIs, taking into account their specific constitutional and legal structure. Basel III provides some scope for instruments other than ‘common shares’ to be recognised as part of Common Equity Tier 1. The Basel III rules text states that ‘the application of the criteria should preserve the quality of the instruments by requiring that they are deemed fully equivalent to common shares in terms of their capital quality as regards loss absorption and do not possess features which could cause the condition of the bank to be weakened as a going concern during periods of market stress.’

There are a number of mutually owned ADIs that have issued instruments currently qualifying as Tier 1 capital. APRA invites submissions from these ADIs as to whether the features of the instruments will comply with the criteria for Common Equity Tier 1 (or Additional Tier 1 criteria, set out in section 2.1.2 …). APRA also invites submissions more generally on how new capital instruments issued by mutually owned ADIs could be deemed to be the equivalent of common shares (or Additional Tier 1 capital) in terms of their capital quality and loss absorption.

Bright Law can advise mutuals on constitutional and legal issues affecting capital raising.

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