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Ian Paterson
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Ian Paterson
Partner
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The spate of proposals, consultations and discussion papers linked to reform of bank capital requirements has continued to gather momentum across the globe. This is not a surprising development in the wake of the GFC. A bank’s ability to access liquidity to meet claims as they fall due in times of crisis is fundamental to its survival. Capital is the cornerstone of its strength, the buffer which enables it to absorb losses and continue to operate. But neither measure has proven fully resilient to the recent global financial storm.
Yesterday’s Basel Committee consultative document on liquidity risk measurement, standards and monitoring follows APRA’s September discussion paper on ADI liquidity risk and the FSA’s earlier liquidity consultation package. The breadth of these proposed reforms derives from the unparalleled levels of central bank liquidity intervention required to support the financial system during the unfolding of the financial crisis. Relevant elements of the proposed liquidity enhancements include the establishment of comprehensive liquidity management tools and stress-testing, together with detailed monitoring and reporting requirements.
Recent developments on capital requirements include the Basel Committee’s consultative document released yesterday on strengthening the resilience of the banking sector and the FSA’s consultation paper on strengthening capital standards. Although APRA released an interim response the Basel Committee’s consultation package this morning, it is yet to release its updated position on ADI capital requirements. However, any reforms in the Australian context should recognise that many of the international proposals are already reflected in the existing Australian requirements. For example, APRA standards already anticipate requirements that coupon payments for non-common equity Tier 1 capital are discretionary and can be made only from distributable reserves. Nonetheless, the proposals include a number of significant departures from existing Australian standards, including a potential prohibition of step-up mechanisms and changes to loss absorbency requirements targeting trigger based common equity conversion or principal and distribution write-down mechanisms.
While much detail remains to be decided with, for example, the Basel Committee consultations open until April 2010 and the FSA capital package seeking responses by March 2010, it seems clear that banks will be subject to higher standards for both liquidity and capital. In these reforms the key questions for regulators and banks are likely to be commercial and quantitative: what liquid assets will the bank be required to hold, will they be available and at what price? How much capital will be required? Will existing forms of hybrid capital continue to satisfy the regulatory requirements? And what will be the cost and lending implications of these changes? We will learn the answers in 2010.