Murray Report clarifies stance on bail-in-able capital

Author: Ashley Lee | Published: 8 Dec 2014
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Australia’s Treasury’s Murray Report is expected to have a transformative effect on the country’s banks. It has also focused on how the jurisdiction might implement a new bail-in-able capital regime.

The Financial Systems Inquiry (FSI) Report, or the Murray Report, made recommendations to bolster the stability of Australia’s financial systems and ensure that retail investors were being adequately protected.

Aside from addressing Basel III capital ratios and other existing regulations, the report also addressed a loss absorbing and recapitalisation capacity framework in line with emerging international practice, referring to the G-20’s total loss absorbing capacity (TLAC) framework.

Like the TLAC proposal, it is intended to ensure ADIs have sufficient capacity to implement a resolution plan.

"The FSI does seem to have endorsed bail-in-able capital in principle, but with some qualifications," said Patrick Lowden, partner at Herbert Smith Freehills in Sydney.

One thing the Inquiry is being quite explicit about is that Australia shouldn’t lead any move down this path, he added. Instead it should move consistently with international practice and not try to lead from the front.

"We obviously moved very early to adopt Basel III, and there was some criticism of some aspects of the way that was done," he said. "The Inquiry has – while seemingly endorsing the concept – qualified this by emphasising that this should be done in terms of what’s consistent with what other jurisdictions are doing."


  • Australia’s Financial Services Inquiry has addressed banks’ loss absorbing and recapitalisation strategy;
  • The FSI emphasised that Australia should not be one of the first to implement this regulation;
  • Regulators will need to clarify where loss absorbing capital sits within a bank’s capital structure, although they’ve confirmed that depositors under statutory protection will not be bailed in;
  • It’s also unclear what instrument will be used for bail-in-able capital. The report proposes that it comprise part of banks’ senior unsecured capital, but institutional investors may not be able to buy those bonds.

Capital structure

One issue is the concept of bail-in-ability itself. John Eagleton, senior associate at King & Wood Mallesons, noted that there is commentary in the FSI’s Report about the importance of contractual certainty.

If bail-in is deemed necessary for the Australian market, he added, it would be helpful to know that whatever the format – whether that is created by Apra’s prudential standards or within a legislative backdrop –it not only fits within Australia’s legislative framework, but also that investors can know with certainty what they’re getting and where they will end up in a bail-in scenario.

" Bail-in should be something to be agreed between the issuer and the investors, rather than being imposed "

"In this respect, bail-in should be something to be agreed between the issuer and the investors, rather than being imposed," Eagleton said.

Potential instruments

But this will likely take some time to develop. In particular it will be difficult to determine what instruments should be bail-in-able.

"The report very sensibly notes that the way to achieve bail-in-able capital will likely be through a mixture of contractual agreements in a supportive legal framework amended to provide that support," said Ian Patterson, partner at King & Wood Mallesons in Sydney.

It does not contemplate reducing senior creditors generally to equity. "Instead it envisages an additional form of capital instruments ranking ahead of tier 2s but behind conventional senior debt," he added.

But all types of bank capital below deposits remain options. "We don’t know how much of a bank’s senior unsecured debt that the FSI envisages will include this bail-in feature," said Lowden.

The report indicated that it will not include deposits protected by the Financial Claims Scheme, but it doesn’t really indicate what amount of the remaining senior unsecured debt should be covered.

"A large requirement could be a challenge given investor mandates don’t often permit investment with this type of feature, but the Inquiry doesn’t go into sufficient detail to gauge whether this is likely to be a problem," he added.

See also

How Australia’s Murray Report changes reg-cap

TLAC proposal raises concerns ahead of Brisbane meeting

Asia’s TLAC questions revealed