The Australian banking regulator has decided to go ahead with its proposal to halve the limit on the exposures of Australian banks to their subsidiaries, catching ANZ Bank between opposing regulatory requirements on each side of the Tasman.
While the Australian Prudential Regulation Authority wants Australian banks to limit their capital exposures to subsidiaries, New Zealand's banking regulator, the Reserve Bank, wants the New Zealand subsidiaries to increase the amount of capital they hold.
APRA says it will go ahead with its proposal to reduce the maximum exposure Australian banks can have to their subsidiaries from 50 percent of total capital to 25 per cent of tier 1 capital. This change will be effective from January 2021.
APRA says the change is "aimed at mitigating contagion risk within banking groups."
Its deputy chair, John Lonsdale, says APRA has only limited visibility of Australian banks' operations in foreign jurisdictions.
"As we saw during the global financial crisis, deficiencies in governance or internal controls in one part of a corporate group can quickly spread and cause financial or reputational damage to an ADI (authorised deposit-taking institutions)," Lonsdale says in a statement.
''Furthermore, complex group structures could potentially make it difficult for APRA to resolve an ADI quickly and protect depositors' savings in the unlikely event of a bank failure."
ANZ Bank is the only Australian bank with an exposure to its NZ subsidiary likely to become larger than 25 percent of tier 1 capital.
ANZ says that APRA's decision means that, "all else being equal, ANZ could have limited capacity to inject capital" into its New Zealand subsidiary, which is the country's largest bank.
"As a result, ANZ NZ may be required to retain a higher proportion of its earnings to meet any potential increased capital requirements and any future capital required in New Zealand may also need to be held at a group level," it says.
Working at cross purposes to APRA's objectives from ANZ's perspective, the Reserve Bank of New Zealand, is proposing to lift the minimum tier 1 capital that the four largest banks in this country have to hold from 8.5 percent of risk-weighted assets to 16 percent.
APRA made its proposal in July last year while RBNZ announced its plans in mid-December.
Earlier this year, broking firm CLSA estimated that ANZ NZ currently accounts for 21.2 per cent of its parent's equity but that if RBNZ's proposals go ahead in their current form, that would rise to 32.3 per cent.
CLSA estimated National Australia Bank's exposure to Bank of New Zealand would rise to 21.9 percent from 14.1 per cent while Commonwealth Bank of Australia's exposure to ASB Bank and Westpac's exposure to its NZ subsidiary would each rise from 15.5 percent to 18.8 per cent.
ANZ says the final impact on the group will depend on a number of factors including the outcome of APRA's and RBNZ's consultations on required capital as well as the size and composition of ANZ's balance sheet at the time these decisions are implemented.
It will also depend on RBNZ's transition period – it has proposed a five-year phase-in period but recent indications are that it may allow a longer period.
"While the changes announced today are effective January 2021, ANZ notes APRA's statement that they are open to providing entity-specific transitional arrangements or flexibility on a case-by-case basis," the Australian bank says.
"ANZ expects this flexibility could include the timeframe available and the circumstances under which an exemption may be available, such as periods of funding market disruption."