RBNZ wants to limit debt instruments available to meet regulatory capital levels
By Paul McBeth
July 14 (BusinessDesk) - The Reserve Bank wants to remove certain debt instruments lenders use to raise funds which can
then be deemed to meet regulatory capital levels set to avoid the event of a meltdown.
The central bank's second options and issues paper on a wide-ranging review of the system's capital framework proposes
limiting common equity and preference shares as the only allowable instruments qualifying as Tier 1 capital, and
long-term subordinated unsecured debt without triggers that freeze interest payments as Tier 2 capital. Other
instruments would still be available for banks to use to fund their operations but wouldn't go towards the regulated
capital levels.
"Given the dominance of parent entities as Tier 1 contingent debt issued by the big four banks, contingent debt appears
to have been used as a substitute for ordinary shares," the Reserve Bank said. "The loss absorbing quality of ordinary
shares is far greater than that provided by contingent debt, thus the quality of capital in the regime has arguably been
harmed by as a result of accepting contingent debt as Tier 1 capital."
The Reserve Bank wants to complete a review of banks' capital settings by early next year, with six high-level
principles: capital can readily absorb losses before they're passed on to creditors and depositors; capital requirements
are set in relation to bank exposures; different methodologies to set capital needs don't create unduly different
outcomes; capital requirements should be conservative compared to international lenders; the framework should be
practical to administer; and the regime should be transparent.
The latest paper is seeking feedback specifically on what instruments should qualify as bank capital, which has seen a
rise in the use of contingent debt after the global financial crisis and adoption of new international banking rules.
The Reserve Bank noted some of the smaller banks aren't able to issue new shares because of their capital structures,
meaning they've had to use contingent debt in an expanding market, however, the current definition has meant certain
types of banks have access to broader and cheaper capital options, which is "in part responsible for a somewhat uneven
playing field".
The regulator's view is that it sees "little regulatory value in 'going concern' triggers and conversion" which
introduce "considerable complexity" into the regime.
Submissions close at the end of the working day on Sept. 8.
(BusinessDesk)
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