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Australia to raise bank capital buffers by less than expected

[SYDNEY] Australia's main financial regulator on Tuesday said it had decided to lift the capital buffer for banks by less than originally proposed, a win for institutions that had argued the targets were too onerous.

The Australian Prudential Regulation Authority (APRA) said banks would now be required to lift their total capital by 3 percentage points of risk weighted assets by Jan 1, 2024, instead of the 4-5 percentage points initially proposed.

APRA said it would take the next four years to consider other methods to reach the original target, which was part of a global effort to beef up banks' ability to absorb losses during times of financial stress.

"Having taken into account feedback on market capacity, increasing Total Capital requirements by three percentage points by 2024...will be easier for the market to absorb and reduce the risk of unintended market consequences," said APRA deputy chair John Lonsdale in a media release.

APRA said the new requirements would strengthen the loss-absorbing capacity of the major banks by a total A$50 billion (S$47.4 billion), while resulting in a minor rise in funding costs of less than 5 basis points.

The four major banks had argued the higher capital target would have been difficult to achieve and added too much to costs, putting pressure on profit margins and lifting rates for borrowers.

In statements released after APRA's announcement, Australia and New Zealand Banking Group said the new requirement will represent an increase of about A$12 billion in total capital, while National Australia Bank (NAB) put the number at A$12.1 billion.

NAB added that it will primarily look to issue Tier 2 capital to meet the 3 percentage point requirement.

APRA said for small to medium finiancial institutions, extra loss-absorbing capacity would be considered on a case-by-case basis as part of the resolution planning process.

The changes are aimed at increasing the financial resources available for APRA to safely wind-up a bank, and minimise the need for taxpayer support, in the unlikely event of failure.