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Table of Contents

Authority

Application

Interpretation

Regulatory Capital

Application of fair values

Common Equity Tier 1 Capital

Additional Tier 1 Capital

Tier 2 Capital

Additional Tier 1 or Tier 2 Capital issued overseas by ADIs or subsidiaries

Use of Special Purpose Vehicles to issue Additional Tier 1 and Tier 2 Capital instruments

Intra-group capital transactions

Holding of capital instruments in group members by other group members

Adjustments and exclusions

Attachment A—Use of fair values

Attachment B—Criteria for classification as paid-up ordinary shares

Attachment C—Minority interest and other capital issued out of fully consolidated subsidiaries that is held by third parties

Attachment D—Regulatory adjustments

Attachment E—Criteria for inclusion in Additional Tier 1 Capital

Attachment F—Loss absorption requirements: Additional Tier 1 Capital

Attachment G—Additional Tier 1 Capital: Stapled security structure

Attachment H—Criteria for inclusion in Tier 2 Capital

Attachment I—Criteria for capital issues involving special purpose vehicles

Attachment J—Loss absorption at the point of non-viability: Additional Tier 1 and Tier 2 Capital instruments

Attachment K—Mutual equity interests

Attachment L—Transitional arrangements for capital instruments

Authority

1.              This Prudential Standard is made under section 11AF of the Banking Act 1959 (the Banking Act).

Application

1.              This Prudential Standard applies to all authorised deposit-taking institutions (ADIs), subject to paragraph 3 of this Prudential Standard.
2.              This Prudential Standard does not apply to:
3.           a foreign ADI that is subject to comparable capital adequacy standards in its home country; or
4.           a purchased payment facility provider (PPF provider).
5.              A reference to an ADI in this Prudential Standard, unless otherwise indicated, is a reference to:
6.           an ADI on a Level 1 basis; and
7.           a group of which an ADI is a member on a Level 2 basis.
8.              If an ADI to which this Prudential Standard applies is:
9.           the holding company for a group of bodies corporate, the ADI must ensure that the requirements in this Prudential Standard are met on a Level 2 basis, where applicable; or
10.           a subsidiary of an authorised non-operating holding company (authorised NOHC), the authorised NOHC must ensure that the requirements in this Prudential Standard are met on a Level 2 basis, where applicable.
11.              This Prudential Standard commences on 1 January 2018.

Interpretation

1.              Terms that are defined in Prudential Standard APS 001 Definitions appear in bold the first time they are used in this Prudential Standard. Where this Prudential Standard provides for APRA to exercise a power or discretion, this power or discretion is to be exercised in writing. In this Prudential Standard, unless the contrary intention appears, a reference to an Act, Regulations, Prudential Standard, Australian Accounting Standard or Australian Auditing and Assurance Standard is a reference to the instrument as in force from time to time.

Regulatory Capital

1.              For the purposes of this Prudential Standard:
2.           a component of capital is any form of capital defined in this Prudential Standard as eligible for inclusion in Regulatory Capital; and
3.           a category of capital is a group of components of capital.
4.              Regulatory Capital (Total Capital) consists of the following categories:
5.           Tier 1 Capital (going-concern capital[1]), which comprises: 1.             Common Equity Tier 1 Capital; 2.          Additional Tier 1 Capital; and 3.        paid-up mutual equity interests issued by a mutually owned ADI that meet the criteria in paragraph 1 of Attachment K of this Prudential Standard that are above the limit specified in paragraph 4 of Attachment K; and
6.           Tier 2 Capital (gone-concern capital[2]).
7.          An ADI must ensure that any component of Regulatory Capital included in its Total Capital satisfies, in both form and substance, all requirements in this Prudential Standard for the particular category of Regulatory Capital in which it is included.
8.          An ADI must not include a component of Regulatory Capital in a particular category of Regulatory Capital if that component, when considered in conjunction with other related transactions that affect its overall economic substance, could be reasonably considered not to satisfy the requirements of this Prudential Standard for that category of Regulatory Capital.
9.          An ADI must ensure that the category of Regulatory Capital in which a component of capital is included, when measured at an individual group member level (Level 1 or equivalent), is not upgraded to a higher category of Regulatory Capital when measured in an ADI’s Regulatory Capital at Level 2. Any such component of capital must be reclassified to the appropriate lower category of Regulatory Capital when measured at Level 2.
10.          An ADI must not include a capital instrument in a category of Regulatory Capital based on a future event, such as the future sale or issuance of a higher quality capital instrument, until such time as:
11.           the future event occurs; and
12.           the proceeds have been irrevocably received by the ADI.
13.          APRA may require an ADI to:
14.           exclude from its Regulatory Capital any component of capital that in APRA’s opinion is not a genuine contribution to the financial strength of the ADI; or
15.           reallocate to a lower category of capital any component of capital that in APRA’s opinion does not satisfy the requirements of this Prudential Standard for the category of Regulatory Capital to which it was originally allocated.
16.          An ADI must provide APRA, as soon as practicable, with copies of documentation associated with the issue of Additional Tier 1 Capital and Tier 2 Capital instruments.
17.          Where the terms of an instrument depart from established precedent, an ADI must consult with APRA on the eligibility of the capital instrument for inclusion in the ADI’s Regulatory Capital in advance of the issuance of the capital instrument, and provide APRA with all information it requires to assess the eligibility of the capital instrument.
18.          An ADI must obtain APRA’s consent before the terms or conditions of an instrument are amended in a way that may affect its eligibility as Regulatory Capital.

Application of fair values

1.          An ADI may measure its financial instruments at fair value for capital adequacy purposes provided it complies with the requirements of Attachment A of this Prudential Standard.

Common Equity Tier 1 Capital

1.          Common Equity Tier 1 Capital comprises the highest quality components of capital that fully satisfy all of the following characteristics:
2.           provide a permanent and unrestricted commitment of funds;
3.           are freely available to absorb losses;
4.           do not impose any unavoidable servicing charge against earnings; and
5.           rank behind the claims of depositors and other creditors in the event of winding-up of the issuer.
6.          Common Equity Tier 1 Capital consists of the sum of:
7.           paid-up ordinary shares issued by an ADI that meet the criteria in Attachment B of this Prudential Standard;
8.           paid-up mutual equity interests issued by a mutually owned ADI that meet the criteria in paragraph 1 of Attachment K of this Prudential Standard up to the limit specified in paragraph 4 of Attachment K;
9.           retained earnings;
10.           undistributed current year earnings (refer to paragraphs 21 to 25 of this Prudential Standard);
11.           accumulated other comprehensive income and other disclosed reserves (refer to paragraphs 26 and 27 of this Prudential Standard);
12.            minority interests (calculated in accordance with Attachment C of this Prudential Standard) arising from the issue of ordinary shares to third parties by a fully consolidated subsidiary[3] included in the Level 2 group where:
13.             the shares giving rise to the minority interest would, if issued by the ADI, meet the criteria in Attachment B of this Prudential Standard; and
14.          the subsidiary issuing the shares is itself an ADI or an overseas deposit-taking institution that is subject to equivalent minimum prudential requirements and level of supervision as an ADI; and
15.           regulatory adjustments applied in the calculation of Common Equity Tier 1 Capital in accordance with Attachment D of this Prudential Standard.
16.          Current year earnings must take into account:
17.           negative goodwill;
18.           the unwinding of any discount on credit loss provisions (refer to Attachment A of Prudential Standard APS 220 Credit Quality (APS 220));
19.           expected tax expenses; and
20.           dividends when declared in accordance with Australian Accounting Standards.
21.          Declared dividends for the purpose of paragraph 21(d) may be reduced by the expected proceeds, as agreed by APRA, of a Dividend Reinvestment Plan (DRP) to the extent that dividends are used to purchase new ordinary shares issued by the ADI. An ADI must review every six months the expected subscription for new ordinary shares under its DRP, having regard to experience over previous years and reasonable expectations of the level of subscription that might apply in future. If an ADI identifies any material change in the expected level of future subscription for new ordinary shares under its DRP, it must notify APRA and obtain APRA’s agreement to a new amount by which declared dividends may be reduced for Regulatory Capital purposes.
22.          Current year earnings also include the full value of upfront fee income provided that:
23.           the fee income has either been received in cash or has been debited to a customer’s account or otherwise forms part of the upfront fees owed by a customer;
24.           outstanding amounts of fee income debited to customer accounts are claimable in full in the event of default by the customer, or capable of being sold to a third party as part of outstanding debts;
25.           the provider of the income has no recourse for repayment in part or full of any prepaid income;
26.           the customer cannot cancel any fees debited to the customer’s account for which they were otherwise obliged to pay upfront; and
27.           there is no requirement for the provision of continuing additional services or products associated with the fee income concerned.
28.          Fee income may include net positive amounts arising from the netting of deferred income and capitalised expenses associated with a product class provided the conditions in paragraph 23 of this Prudential Standard are satisfied.
29.          Current year earnings and retained earnings may include fair value adjustments provided these adjustments satisfy the requirements for the recognition of fair values set out in Attachment A and Attachment D of this Prudential Standard.
30.          Accumulated other comprehensive income and other disclosed reserves include, but are not limited to:
31.           unrealised gains or losses recognised on the balance sheet;
32.           reserves from equity-settled share-based payments (share or share options) granted to employees as part of their remuneration package provided that: 1.             the share or share options granted relate only to the ordinary shares of the ADI; 2.          the ordinary shares comprise only new ordinary shares to be issued by the ADI to employees, or new ordinary shares already issued by the ADI to employees for this specific purpose; and 3.        there are no circumstances under which such remuneration can be converted into another form (e.g. cash).

Any other reserves associated with share-based payments must be excluded from Regulatory Capital;

1.           foreign currency translation reserve;
2.           cumulative unrealised gains or losses on hedges[4] offsetting gains or losses included in Common Equity Tier 1 Capital (such as movements in the currency value of foreign-currency-denominated hedging instruments that offset movements in foreign-currency-denominated items recognised in the foreign currency translation reserve). This includes fair value gains or losses on derivatives representing effective e

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