In Response to Tier II Bonds Repayment Message, APRA Chairman Remains Unapologetic

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APRA’s new chairman, John Lonsdale, has warned banks and insurers that they will face harsh scrutiny if they choose to appease the bond market by repaying too-big-to-fail Tier II bonds with new, more expensive financing.

Lonsdale addressed APRA’s stance on the payment of these bonds. He noted that while it was important for financial institutions to respond to market demands, it should not come at the expense of sound risk management practice.

APRA Chairman Wayne Byres

The financial market was caught off guard late last year when outgoing APRA chairman Wayne Byres and then John Lonsdale, in a November letter, raised concerns about the repayment of Tier II bonds.

Australian banks and insurers issued these bonds to provide additional capital and remain compliant with regulatory requirements for maintaining adequate amounts of capital. Investors in the bonds were unnerved by the comments from Byres and Lonsdale, causing them to sell off sharply.

Mr Lonsdale said, “There were reverberations in the market [after the November letter] – that is good because we have a message out there,”

“But my message to regulated entities is we will be going through every one of these calls very, very closely and making sure they adhere to the standards, as that is important to depositors and the system’s stability.”

APRA has earmarked Tier II bonds to form the bulk of Australian banks’ so-called too-big-to-fail capital requirements, requiring them to raise to $70 billion in that format within the next three years.

The letter written by outgoing APRA chairman Wayne Byres and incoming chairman John Lonsdale in November last year resulted in a shockwave of fear amongst investors, sending bond prices plummeting and causing a wave of uncertainty in the market. 

It remains to be seen how the banks and insurers react to APRA’s stance on Tier II bond repayment. One thing is sure though – with John Lonsdale at the helm, financial institutions can expect tough scrutiny if they do not follow the guidelines set out by APRA’s too-big-to-fail capital requirements.

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