Australia’s big-four banks will be issuing a significant volume of tier-two securities under the new rules but senior-unsecured bonds will remain the backbone of their wholesale programmes.

In its initial proposal on TLAC in November 2018, the Australian Prudential Regulation Authority (APRA) set out an increase in the total regulatory capital requirement of 4-5 per cent of risk-weighted assets (RWAs) for the four Australian domestic systemically important banks.

Critically, APRA also proposed that this uplift be delivered through the issuance of existing capital instruments – assumed to be tier-two bonds – rather than through the introduction of new forms of loss-absorbing instruments.

In July 2019, APRA updated and finalised its TLAC approach. The regulator revealed that it has decided to reduce the proposed additional total-capital uplift required of the Australian majors to 3 per cent of RWAs by the start of 2024.

The big four will eventually need to increase capital by a further 1-2 per cent on top of this initial requirement. But APRA plans to consider how this secondary uplift should be managed over the coming years.

APRA also confirmed its initial position on how the TLAC uplift should be funded. Other jurisdictions have introduced a new instrument between tier-two and senior-unsecured in the capital stack or made all senior debt subject to bail-in. But the Australian approach remains that the TLAC requirement be funded in the existing tier-two format with no change to the structure of notes or the capital stack.

During the consultation period, a number of industry submissions looked closely at the question of whether the proposed RWA uplift of 4-5 per cent points was an achievable and appropriate size given concerns about the capacity of tier-two markets to support this quantum of funding through a range of market conditions over the ramp-up period. APRA’s decision to lower the total capital uplift is a concession to these capacity concerns.

The format and structure of Australian tier-two will not change; there will just be more of it, and the incremental issuance will likely replace some senior funding. The majors, however, still expect senior debt to be their primary wholesale-funding instrument.