APRA announces additional loss-absorbing capacity requirements

  • By Zilla Efrat

The Australian Prudential Regulation Authority (APRA) is finalising requirements for the four major banks to maintain additional loss-absorbing capacity (LAC).

It says the purpose of the adjustment is to ensure that, in the unlikely event of a failure, a major bank could be recapitalised using a large pool of private, rather than taxpayer, funds.

Yesterday, APRA wrote to the major banks confirming that the final setting for LAC will be an increase in minimum total capital requirements of 4.5 percentage points of risk-weighted assets, to be met from 1 January 2026.

APRA says the major banks have already made significant progress towards meeting this requirement, having met interim targets put in place following the consultation in 2018.

“Crisis preparedness and resolution planning gets to the very heart of APRA’s purpose to protect the financial interests of bank depositors, insurance policyholders and superannuation members,” says deputy APRA chair John Lonsdale.

“Although Australia has one of the strongest and most stable financial systems in the world, and failures are extremely rare, businesses in any competitive market can face financial difficulties. Should that happen, we want to be sure each entity has the capability to either recover, or manage an orderly exit, with the smallest possible impact on the community and the financial system.

“APRA-regulated entities have made substantial improvements in contingency planning over recent years. However, there remains large gaps in capabilities between entities and across industries. By laying out a consistent, transparent and enforceable framework, APRA will be better able to strengthen crisis preparedness and close those gaps.”