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
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)
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
- 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
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.
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.
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