The new APS 111 incorporates new loss absorption criteria which
allows mutually owned authorised deposit-taking institutions,
namely credit unions, building societies and mutual banks
(collectively, mutual ADIs) to issue Additional
Tier 1 or Tier 2 Capital instruments that provide for conversion
into mutual equity interests (MEIs) in the event
that the loss absorption or non-viability provisions in these
instruments are triggered.
MEIs that result from such a conversion will count towards
Common Equity Tier 1 (CET1) Capital provided they
comply with the relevant provisions of APS 111.
Reasons for amendments
Prior to Australia's implementation of the Basel III capital
reforms, mutual ADIs could issue capital instruments that counted
towards their regulatory capital. This all changed following the
introduction of new Basel III capital standards, which came into
effect in Australia on 1 January 2013.
Under the new standards, capital instruments could only be
counted towards regulatory capital if, amongst other criteria, they
were capable of being written off or converted into ordinary
shares. As mutual ADIs cannot issue ordinary shares because of
their mutual structure, the new criteria resulted in a much reduced
capacity for mutual ADIs to raise regulatory capital within the new
The amended APS 111 addresses this problem by allowing mutual
ADIs to issue capital instruments that will be recognised as
Additional Tier 1 or Tier 2 Capital provided the instruments are
convertible into MEIs if certain conversion criteria is met.
Moreover, on conversion, MEIs can be counted towards CET1 Capital
for capital adequacy purposes.
The criteria which must be satisfied by MEIs are set out in a
new Attachment K to APS 111.
In making these changes, APRA has liaised closely with the
Australian Securities and Investments Commission
(ASIC) to ensure that the requirements for the
issue of MEIs are consistent with ASIC's guidance under
Regulatory Guide 147 Mutuality - Financial Institutions and the
demutualisation provisions in Part 5 of Schedule 4 to the
Corporations Act 2001. Mutual ADIs will need to take into account
these provisions when issuing Additional Tier 1 or Tier 2 Capital
instruments and on any subsequent conversion of those instruments
APRA has also liaised closely with the Customer Owned Banking
Association, the peak industry body for the mutual sector, to
ensure that the requirements for the issue of MEIs are practical to
implement, and take into account the needs of potential investors
vis-ŕ-vis existing members of mutual ADIs.
Further refinements to the capital framework
The mutual sector has supported the changes as a welcome first
step towards providing mutual ADIs with additional flexibility for
capital management. At the same time, it is pressing for further
refinements to the capital framework which will allow mutual ADIs
to directly issue CET1 instruments in the ordinary course of
business, rather than only in a conversion scenario.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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