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APRA proposes new capital requirements for banks' investments in units

The Australian Prudential Regulation Authority has launched a review of the capital treatment of banks' investments in their banking and insurance subsidiaries.

The move is aimed at balancing the benefits of revenue diversification that banks could achieve by owning subsidiary operations against the potential concentration risk that arises as these investments grow.

APRA proposed increasing the capital banks must hold to offset concentrated exposures to foreign or domestic banking or insurance subsidiaries, as well as reducing banks' capital to offset smaller exposures to banking or insurance subsidiaries.

The regulator estimates no material additional capital would be required at an aggregate industry level, although this may depend on the level of exposure a bank has to its subsidiaries.

APRA's proposals were partly shaped by the Reserve Bank of New Zealand's proposal to substantially raise regulatory capital for the country's banks, with four of New Zealand's largest banks owned by Australia's four major banks. APRA notes that it has held discussions with New Zealand's central bank on the proposed revisions.

APRA plans to finalize its changes after Jan. 31, 2020, while the revised standard is expected to take effect Jan. 1, 2021.

In response, Australia & New Zealand Banking Group Ltd. and Westpac Banking Corp. said they were reviewing APRA's consultation paper. Meanwhile, National Australia Bank Ltd. and Commonwealth Bank of Australia said the proposed changes would not, on a pro forma basis, affect the amount of capital it is required to hold.