NZ central bank queries value of Additional Tier 1 bank capital
(22 August 2017 – New Zealand) The Reserve Bank of New Zealand (RBNZ) has tabled proposals to restrict Tier 1 capital instruments to common equity and preference shares. The move threatens to rule out future issuance of callable AT1 securities.
The central bank outlined its misgivings about the AT1 format in its July Capital Review Paper 2 consultation document, which is open to responses until Sept. 8.
Although the RBNZ lists various factors peculiar to the New Zealand market in support of its proposals, the document raises broader questions about the value of contingent debt instruments like AT1 and Tier 2 bonds.
“The loss-absorbing quality of ordinary shares is far greater than that provided by contingent debt, thus the quality of capital in the regime has arguably been harmed by accepting contingent debt as Tier 1 capital," RBNZ said in the paper.
"As a general direction, the Reserve Bank prefers to move towards a regime that accepts subordinated debt without triggers as capital, but not contingent debt, and, moreover, accepts such debt as lower tier regulatory capital, not Tier 1."
Although banks can still offer contingent debt, proceeds will not count towards regulated capital levels.
The RBNZ says its aim is “a capital regime that is easy for banks to comply with and simple to administer”. It says it has encountered "difficulties" in its oversight of contingent debt, for instance having to disqualify outstanding bank bonds as bank capital even though it had not objected to them initially.
The RBNZ expresses a lack of confidence in “going-concern” conversion debt instruments introduced since the global financial crisis which it says adds complexity and provides little regulatory value, while being open to legal challenges.
According to the paper, certain domestic characteristics raise questions about contingent capital. The central bank cites that around 90 percent of the AT1 capital issued in New Zealand by the big four banks has been redistributed to their Australia-based parent entities. Additionally, substitution of AT1 debt for ordinary share capital is of concern to the central bank, as the latter absorbs ongoing losses while contingent debt may only be required to do so should the bank has become non-viable.
Public AT1 offerings are rare among New Zealand’s four majors with only one outstanding – ANZ Bank New Zealand’s NZ$500 million 7.20 percent perpetual non-call five retail ANZ Capital Notes, issued in March 2015.
Additionally, the New Zealand majors have A$2.8 billion of outstanding AT1 debt placed with their Australian parents.
New Zealand's big four, which account for around 90 percent of aggregate bank assets in the country, are locally incorporated subsidiaries of their Australian-incorporated banking parents.
They are subject to Australian and New Zealand bank capital regulations and capital issued by ANZ Bank New Zealand, ASB Bank Ltd, BNZ and Westpac New Zealand Ltd qualifies as capital both for the New Zealand bank and Australian parent.
Banks have until 8 September 2017 to submit their responses, with the RBNZ expected to release a final report early 2018.
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