Specifically, it is unclear how the Australian Prudential Regulation Authority (APRA) would view increased capital in the New Zealand banking system. Under current Australian regulation, more heavily capitalised New Zealand subsidiaries would not contribute to an improved group capital position.

A Westpac Institutional Bank (Westpac) research note states that “at this point, capital held at subsidiaries does not [affect] level-two bank reporting with the banks’ exposure to their subsidiaries recognised through a 400 per cent risk weighting. Therefore, the increased New Zealand capital has no benefit for the parent”.

APRA is playing its cards close to its chest. A spokesperson declined to comment to KangaNews beyond saying the regulator is still determining how the proposed changes in New Zealand will be treated under the Australian capital framework.

A range of proposals for consultation on capital are currently in process, meaning plenty of potential moving pieces. The Australian regulator says the possible New Zealand changes will be considered as the Australian capital framework is finalised in the coming years.

Some analysts are prepared to predict a negative response should the Australian majors seek further to support their subsidiaries’ capital positions. A UBS research note says: “APRA is likely to be uncomfortable with substantial amounts of capital being transferred out of Australia and into New Zealand. This would reduce the amount of capital available in the level-one businesses which is available to protect Australian depositors.” It adds that this may place compliance with APRA’s “unquestionably strong” requirement at risk.

Higher capital requirements in New Zealand could have a wider impact on the value of the subsidiary businesses to the Australian big-four bank groups. The Westpac note suggests: “The sharp lift in capital requirements will result in a significant erosion of return on equity across all [affected] business lines and the bank more broadly and therefore the parent is likely to review existing capital allocation.”

In something of a lose-lose situation, the Westpac note also predicts that greater capitalisation in New Zealand will not prompt a cost-of-funds benefit for those issuers in wholesale debt markets.

The Westpac research note concludes: “The ownership structure of the banks has a direct impact on ratings and provides benchmark pricing for the New Zealand D-SIBs [domestic systemically important banks] which is likely to prevent any significant repricing of the New Zealand bank curve as a result of the increase in capital. Any decrease in supply may see some scarcity value attached to D-SIB bonds moving forward, however it is unlikely that the New Zealand banks would price through their parents’ spread levels, or even flat, despite holding considerably higher capital ratios.”

Hamlyn explains: “Our understanding is that the AOFM sees some value in having a structural linker programme. Issuers learned during the financial crisis that it is all well and good to retire various funding capabilities when they aren’t needed but to reintroduce them requires significant work. We might see reduced issuance of nominal and inflation-linked bonds but our understanding is issuance will continue.”

Tyler adds: “I don’t think the AOFM will let the programme get too low. It provides access to a different investor base and diversifies its funding sources.”

At the same time, there is no expectation of a glut of linkers. “The AOFM is good at issuing into pockets of demand so I don’t believe it will flood the market with linker paper – unless there is demand for it,” Langer comments.