The attached assignment is NOT a model answer but rather an indication of how one syndicate group approached the problem set for that semester.
It was one of the better papers but ………
Please note that the Executive Summary portion received a fail as it did not concentrate on what the group had recommended – the alternatives and why which one was chosen.
They did, however, develop some alternatives, discussed them and then decided which one should be selected within the main body of the paper.
It is also worth noting that for a 2008 assignment; almost all of the references were from that year. There are NO textbooks listed.

AFF92
260: Aust ralian Cap pital Mark kets Semester 2‐ 2
S
2008

MZM C ON ULT ING
M M
NSU
G

MRCB gula y Ca al
B Reg atory apita
Fu ing Alte ative und erna es

Authors:

Version

1.0

Date e Issued:

25/09/
/2008

Word Count:

5,000 (no ot including ta ables) MZM CONSULTING

Paul Masulan ns, Alex Zaikin ne, David McG
Ghee
Monash Unive
M
ersity
Level 3 Building H
900 Dandenon ng Rd.
PO Box x 197
Caulfield East, Victoria 3145
Australia

25 Septem mber 2008

Re: Regulatory Capita al Funding Alternatives

CB Board,
Dear MRC
Please find the attach hed report on n regulatory capital funding alternatives. ument has b been prepare for the C ed Chairman and Directors of the Mon ash Retail Commercial B
C
Bank
This docu
(MRCB) to o be tabled a at the Septem mber 2008 b board meetin ng. The docu ument is in re esponse to a a specific req quest from the MRCB Chairm man. atters of typ cost, nat pe, ture and description of alternative funding inst truments. It also
The report covers ma the capital adequacy re equirements for Australia an Authorise ed Depositor ry Institution ns (ADIs) thro ough examines n tory environ ment, current capital ra aising trends and possib future trends s ble discussion of the current regulat within tha at arena.
The repor rt comes to s specific recommendation ns based on the outline p provided and d it is hoped this informa ation provides a useful ba asis for your endeavou rs. Should you require any furthe r informatio or discus y on ssion g the recomm mendation pl lease feel fre ee to contact t MZM Consu ulting on the e details give en below. regarding Regards, X, Y and Z
Student X Disclaimer: The name and logo of MZM Consu ulting are fictitiou us and used for e educational purpo oses. Any resemb blance to real life is purely coincide ental. AFF9260: MR
RCB: Regulatory C
Capital Funding Alternatives

MZM CONSULTING

Execut tive Summ mary The follow wing report analyses the regulatory market, an industry conditions in e y, nd c nfluencing re egulatory ca apital funding alternatives fo or the Mona ash Retail Co mmercial Ba ank (MRCB). of the regulatory environ nment and th he dynamics within the A
ADI industry demonstrate that Australian
Analysis o banks are e well capitalised with a Total Capita al ratio of 10
0.5% as at M
March 2008. IIt also shows that Australian banks pursue an act tive approac to capita l manageme with the majority o regulator capital raising ch ent e of ry throughout 2007/08 b being in the f form of:


Conversion of f existing pre eference sha res into ordi inary equity



investment p programs Underwriting dividend rei



he issue of h hybrid Tier 1 instruments s Th



Th he issue of te erm subordinated and se enior debt in n overseas de ebt markets

The repor rt recognises s that curren nt market co onditions hav ve altered th he landscape e of regulato ory capital raising for ADIs. Specific chan nges have in ncluded the c closure of se ecuritisation markets, the e re‐interme ediation of credit banking secto or and a chan nged investo or enthusiasm m for debt in nstruments. into the b
These asp pects led the report to focus on an instrument that would ensure full subscription from inves e n t n stors whilst pro oviding favourable conditions for M
MRCB. It was thus recom mmended tha MRCB undertake a public at issue of an appropriat te convertible preferenc ce share such h that it wou uld be classif fied as Non‐Innovative T
Tier 1 y onvertible preference sh hares offer favourable terms to the issuer whilst the abilit to f t e ty regulatory capital. Co obtain ord dinary shares at a later d date attracts potential inv vestors. Recent sim milar conver rtible prefere ence share i ssues by mo ost major Au ustralian ADI s and some of their regi ional counterpa arts should p provide confidence that a an MRCB iss sue would be e welcomed by investors s whilst provi iding a reasona ably priced so ource of fund ding. 1

AFF9260: MR
RCB: Regulatory C
Capital Funding Alternatives

MZM CONSULTING

Table o of Conten nts Executive e Summary .......................................
...................
......................................
...................
....................... 1
1.

Intro oduction ..........................................
...................
......................................
...................
....................... 3

1.1.

Pu urpose ............................................................ ........................
...................................................................................................... 3

1.2.

Sc cope ................................................................ ........................
...................................................................................................... 3

1.3.

M
Methodology .................................................... ........................
...................................................................................................... 3

1.4.

Lim mitations ....................................................... ........................
.
...................................................................................................... 3

2.

Regu ulatory Envir ronment ........................
...................
......................................
...................
....................... 3

2.1.

To otal Risk Weighted Assets .............................. ........................
...................................................................................................... 4

2.2.

Re egulatory Capital Classification ns and Limits ... ........................
...................................................................................................... 4

2.3.

Re egulatory Capital Deductions ......................... ........................
...................................................................................................... 5

2.4.

Fu uture Regulator ry Trends ................................ ........................
.
...................................................................................................... 6

3.

Rece ent Capital M
Management
t Trends ......
...................
......................................
...................
....................... 6

3.1.

Industry Capital P
Position .................................. ........................
...................................................................................................... 7

3.2.

ecent Capital Issues ........................................ ........................
...................................................................................................... 7
Re

3.3.

BO
OQ Capital Man nagement Strat tegy ................. ........................
.................................................................................................... 10

3.4.

Cu urrent Market E
Environment ........................... ........................
.................................................................................................... 12

4.

MRC
CB Funding A
Alternatives ...................
...................
......................................
...................
......................12

4.1.

Co onvertible Prefe erence Shares ......................... ........................
.................................................................................................... 13

4.2.

Su ubordinated De ebt ‐ Floating Ra ate Note .......... ........................
.................................................................................................... 14

4.3.

Co onvertible Bond d/Note .................................... ........................
.................................................................................................... 15

5.

Reco ommendatio on ..................................
...................
......................................
...................
......................16

6.

Conc clusion .............................................
...................
......................................
...................
......................17

7.

Refe erences .............................................
...................
......................................
...................
......................19

8.

endices ............................................
...................
......................................
...................
......................21
Appe

Ap ppendix A ‐ Reg gulatory Capital l Definitions .... ........................
.................................................................................................... 21

List of Fi igures & Ta ables Figure 2.1 ‐ Reclassification n and limits of c capital requirem ments under the Basel II frame ework for ADI’s
Table 2.1 ‐ C
Capital position n of Australian b banks as at Ma arch 2008, all va alues in $ billion n (source ‐ APRA
A, 2008)
Table 3.1 ‐ S
Summary of rec cent regulatory capital raisings s for Australian n ADI’s througho out 2008
Table 3.2 ‐ R
Risk weighted c capital ratios for BOQ as at 29 February 2008
8
Table 3.3 ‐ h highlights of BO
OQ capital raisin ngs and securit tisation program mmes since 200
00

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RCB: Regulatory C
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1.

In ntroduct tion

1.1.

P
Purpose

It is intended that this document be used by the MRCB D
Directors and d Chairman t to guide their understan nding e instrument ts for use as regulatory c capital through providing g: of suitable


An overview o of the regula atory landsca ape in relatio on to ADIs capital require ements 

cent peer regulatory cap pital raisings and capital m managemen t strategies
Analysis of rec



nvestigation of funding alternatives w with outlined d benefits, co osts and tax iimplications
In



recommend
A
dation of an appropriate strategy wit th supporting g informatio n as to its su uitability 1.2.

Scope

In analysi the exist ing ting regulatory environm ment this re eport outlines relevant changes tha have rece at ently occurred and their im mplications to the MRC B situation. Possible fut t ture directio of regula ons ation within this environment are also examined.

1.3.

M
Methodolo
ogy

In order to complete this repor informatio has been sourced from electro e rt on f onic sources Key legisla
s.
ative and mplications on ADIs wer primarily sourced fro the Aust ralian Prude o re om ential Regula ation changes a their im
Authority (APRA). In nformation relating to peer activit r ties was sourced from recent Pro oduct Disclo osure nts nd ns able from an nnouncemen made to the Australian nts o
Statemen (PDS) an investor presentation as availa s Exchange (ASX). Data f from journalls and newsp paper article es have been n used to giv ve foresight into
Securities
recommendations and d future pred dictions. 1.4.

L
Limitation
ns

The limita ations of this s report relat te to the lack k of available e information relating to o MRCB. Furt ther consulta ation with the MRCB board in relation to their ca d n apital manag gement strat tegy would h have assiste in achievi a ed ing rategy and is thus recom mended. more over‐arching str

2.

R
Regulator
ry Enviro onment There has s been considerable chan nge in the re egulatory en nvironment c covering ADI capital raising over the past few years
s. The two ar reas of most relevance in nclude: 

Th he introduct tion of the Ba asel II framew work for pru udential regu ulation on 1 J
January 2008
8
3

AFF9260: MR
RCB: Regulatory C
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MZM CONSULTING



he ment of Aus stralian repo orting entities to adopt the Intern t national Fina ancial Reporting
Th requirem
St
tandards (IFR
RS) for repor rting periods s since 1 Janu uary 2005

Basel II ha as introduced a more risk‐sensitive a approach to c capital adequacy require ements with its main focu us of promoting improved methodolo g ogies for as ssessing risk faced by ADIs. The adoption of IFRS chan ks o nged accountin ng standards in relation t to the recog gnition of ass sets, liabilitie es, equity, re evenue and expenses. G
Given
APRA’s re eliance on accounting standards f many of its regulatory definit for tions, this in ntroduction had significant potential impact on APRA’s prude t ential and re eporting stan ndards (APRA 2004). Th key points for
A,
he
MRCB to review in light of the cur rrent regulat ory environm ment therefo ore include:


Th he calculatio on of total ris sk weighted assets



Th he re‐classifi ication of reg gulatory cap ital



D
Deductions re equired from m regulatory c capital 2.1.

T
Total Risk k Weighted Assets

Although not directly related to capital raising g, the measu urement of t total risk‐we ighted asset ts impacts on n the f uired. In the determinat e tion of risk‐w weighted as ssets Basel II introduces the s extent of regulatory capital requ requireme ent for regulatory capita al to cover o operational r risk in addition to credit t and market risks that w were covered u so es vels of meas under its predecessor. Basel II als introduce three lev surement available to ADIs
(standardised approac ch, internal a approach an nd advanced approach) depending on n their ability y to identify risks eir organisation (APRA, 2
2008).
within the
The accur racy of the risk weighting gs increases w with the more defined m measurement t technique. This has led d to a decline in n required re egulatory cap pital for ban nks adopting g the more sophisticated d risk assessm ment techniques
(APRA, 20
008). As MR currently adopts a standardised approach for its cred it risk and a basic indic
RCB
d a cator approach for its operational risk it is reaso k, onable to co onclude that its total ris sk‐weighted assets could be quire adopt ion of more sophisticat risk me e ted easurement practices an is nd overstated. Reduction would req ed beyond th he scope of this review. considere 2.2.

R
Regulatory
y Capital Classifica ations and d Limits

APRA de‐c coupled the definition of f instrument ts eligible for r capital from m the IFRS ac ccounting sta andards with h the introducti ion of Basel II. This allowed instru uments that could be classified as liabilities under IFRS to be c o included in capital (A
APRA, 2006). New capit al categories and limits introduced by APRA are shown in the n below and th he definitions s and suitablle instrumen nts are outlin ned in Appen ndix A. diagram b

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AFF9260: MR
RCB: Regulatory C
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MZM CONSULTING

Regula atory Capital

≥ 5
50% Regulatory
Capital

Ti ier 1 Capital

Tier 2 Capital

Res sidual Tier 1 Ca apital ≤ 25% Tier 1
Capital

Upper Tier 2
Fundamen
ntal Tier 1
Capital

Lo ower Tier 2

Non‐Innov vative Innovat tive ≤
≤ 15% Tier 1 Capital

Figure 2.1 ‐ Reclassification n and limits of c capital requirem ments under the Basel II frame ework for ADI’s (Source ‐ APRA
A, 2008)

Instrumen eligible f Tier 1 cla nts for assification h become more string has gent than th classificat he tions used under
Basel I wi ith certain hybrids movin ng to Tier 2 classification
n. Also of im mportance is the 15% lim mit of total T
Tier 1
Capital placed on Innovative Tie 1 Capital . Any innov er vative instruments in ex xcess of thi 15% limit are is t c r s ative deducted from Tier 1 and are classified as Upper Tier 2 Capital. As a numb er of banks had innova nts on issue that exceed ded this new w limit APRA established transitional arrangemen nts for enfor rcing instrumen these ded ductions and these arrangements ext tend to 1 Jan nuary 2016 (A
APRA, 2008) .

2.3.

R
Regulatory
y Capital Deductio ns

Basel II ch hanged the r rules with respect to req uired deductions from capital. For as s intangibles s and ssets such as deferred t tax assets, the deduction approach reflects an a assumption by regulator rs that these e assets will have no value in the event t that the bank is in distr ress. For oth her assets (e.g. investme ents in subsid diaries and o other e deduction approach re eflects a desi re to preven nt double leveraging of ca apital (APRA, 2008). banks) the
The chang ges under Ba asel II (and IFRS along w with it) broug ght two impo ortant chang ges to the de eduction rules: a greater re equired num mber of deductions and a larger propo ortion of the em to be ma de from Tier r 1 capital. These changes h have had a material imp pact on capiital requirem ments and re educed the s substantial benefit obta b ained from the reduction in n risk‐weight ted assets. In n effect, the e majority of f any Basel III benefit tha at flows to b banks fested itself i in a reductio on in required d Tier 2 capital rather than Tier 1 cap pital (APRA, 2
2007).
has manif

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RCB: Regulatory C
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2.4.

F
Future Reg gulatory T
Trends

Legislative environme e ents are constantly in a state of flux Any replac
x.
cement, adv vancement or amendme is o ent generally aimed at im mproving problems or issu ues associate ed with prev vious version ns. As such, t there are a ra ange tory issues be eing discusse ed that are o of relevance to MRCB: of regulat
On‐going
g Refineme ents to Risk Estimates
While AP
PRA have be een comfort table to acc credit banks that are able to use the advanc s a ced approac ches, refinemen nts to risk es stimates will be always ev volving. Capital fo or Interest Rate Risk i in the Bank king Book (IRRBB)
APRA has required th banks with approva l to use the advanced approaches should also have an explicit s hat w e a capital re equirement f IRRBB (A for APRA, 2008) Further in
).
ncorporation of IRRBB iinto banks operating at the n o t standard approaches is thus anticipated. ial Capital R
Ratio (PCR)
)
Prudenti
Pillar 2 of the new framework pro f ovides that A PRA set each h bank an ind dividual PCR
R. APRA is cur rrently review wing internal capital requir rement estim mates for ind dividual bank ks and are co omparing th hem with cap pital benchm marks el. This analy sis will be us sed to determine banks t that require a PCR above e 8% from their PAIRS risk rating mode
008).
(APRA, 20
Securitis
sation and L
Liquidity Fa acilities Given the e recent glob bal market tu urmoil it is liikely that the e Basel Committee will r revisit its policy settings.
. Key areas like to be reviewed inclu the rela ely ude atively low capital requirements fo highly‐rate securitisa or ed ation exposures and short‐term liquidit facilities, and whethe capital con s ty er ncessions fo instruments in the tra or ading book remain valid (BIS
S, 2008). on of Capita al Definitio
A clear de efinition of c capital, i.e. the types of instruments s that are recognised as capital and the various sub‐ classes wi ithin it, is als so currently b being investiigated by the e Basel Committee. This has the pote ential to prod duce significant t changes to the compos sition of capiital available to banks (BIS, 2008).

3.

R
Recent Ca apital Ma anagemen nt Trend ds Australian n ADI’s typically pursue a an active ap proach to ca apital manag gement invo olving ongoin ng reviews of f the level and compositio of their regulatory capital base The majo d on
e.
ority of cap ital manage ement strate egies throughout 2007/08 h have focusse ed on (APRA,
, 2008):
6

AFF9260: MR
RCB: Regulatory C
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MZM CONSULTING



f existing pre eference sha res into ordi inary equity
Conversion of



investment p programs (DRPs)
Underwriting dividend rei



he issue of h hybrid Tier 1 instruments s Th



Th he issue of te erm subordinated and se enior debt in n overseas de ebt markets

To unders stand these trends more accurately the current capital pos y t sition of the Australian banking indu ustry and recen nt ADI capita al raisings sh hould be und derstood. To o provide MR
RCB with a p peer compar rison the Ban nk of
Queensland (BOQ) ca apital management stra ategy will be introduced. Finally, re elevant issu affecting the ues g current m market are ou utlined. 3.1.

In ndustry C
Capital Po osition The curre ent position o of all Austral lian locally‐in ncorporated banks as at March 2008
8 is given in t table 2.1. Th he 22 institution ns had total regulatory capital amoun which eligible e Tier 1 capit tal accounted for nting to $140 billion of w
n. Aggregate
$98 billion e risk‐weight ted assets w were $1,341 b billion giving g capital ratio os of 7.3% T
Tier 1 Capital l and
10.5% Tot tal Capital (A
APRA, 2008).

Tier 1 Cap pital Tier 2 Ca apital Total C
Capital

Risk W
Weighted
Assets
A

Tie er 1 Capital
Ratio

Total Capital
T
Ratio

Maj jor Banks

74

35

10
07

1058
1

7.0%

10.1%

Oth her Aust. Owned

15

7

22
2

184

8.2%

11.8%

Foreign Owned

9

3

11
1

99

8.6%

11.3%

Tot tal 98

44

14
40

1341
1

7.3%

10.5%

Table 2.1 ‐ C
Capital position n of Australian b banks as at Ma arch 2008, all va alues in $ billion n (source ‐ APRA
A, 2008)

Assuming a minimum capital req g m quirement of 8%, the ba f anking system had surpl us capital of $33 billion and m f surplus Ti ier 1 capital of $44 billio on. If a Tier 1
1 ratio of 6.5
5% is used as s a benchma ark (given this is a comm monly used target for many of the larger banks) the re was an ad dditional $11
1 billion of T
Tier 1 capital in the system at
March 2008.

3.2.

R
Recent Cap pital Issue es Capital ra aising by Aus stralian bank ks throughou ut 2008 has seen the issue of hybrid d securities w with the majority being in t form of Convertible Preference Shares. Tab 3.1 outlin these ca the ble nes apital raisings for 5 ADIs and s they are b briefly discus ssed below.
ANZ ‐ Con nvertible P
Preference S
Shares (CPS
S)
The Australian and N
New Zealand Banking G d Group Limite (ANZ) are in the pro ed ocess of issuing conver rtible preferenc shares (C tive Residua Tier 1 cap ce CPS) to raise in excess o AUD$500 million of Non‐Innovat e of
0
al pital. 7

AFF9260: MR
RCB: Regulatory C
Capital Funding Alternatives

MZM CONSULTING

of eceive fully franked, pre eferred, non n‐cumulative, floating rat distributions at 250 b te basis
Holders o CPS will re points above the 90 day Band Bill Rate (BBR The ANZ CPS will con
R).
nvert into a v mber of ordi inary variable num e 2014 if conv version cond ditions are sa atisfied (ANZ
Z, 2008). shares on the 16 June tapled Prefe erred Secur rity (SPS)
WBC ‐ St rporation (W
WBC) conduct ted a SPS of ffer in July of 2008 and r rose in excess of AUD$1
1,000
Westpac Banking Cor ach Westpac c SPS consisted of a fully paid, convertible, perpetual prefere nce share iss sued by Wes stpac million. Ea stapled to a fully paid, perpetual, non‐cumu lative, subordinated, un o nsecured not issued by Westpac’s New te y
York bran nch. The stap pling ensure the initial distribution consisted of interest on the note converting to a ed ns e dividend on the Pref ference Share should c certain conditions occur Funds rais
r.
sed were classified as N
Non‐
e Tier 1 capit tal (Westpac c, 2008).
Innovative
MQG ‐ Co onvertible P
Preference Share (CPS
S)
Macquarie Group Lim mited (MQG) issued Conv vertible Prefe erence Share es (CPS) to r raise AUD$60
00 million in n July e key differences betwee en the MQG and the AN
NZ CPS includ ded a fixed (a at 10.945% p.a.) distribu ution 2008. The and the is ssue being co ompleted thr rough a non‐
‐operating holding comp pany. As such h funds raise ed were class sified as Innovative Tier 1 ca apital for the e MQG balan nce sheet (Macquarie, 20
008).
erpetual Non‐Cumulati ive Shares
NAB ‐ Pe
Bank of N
New Zealand (BNZ) Income Securitie Limited, an indirectly owned sub d es a bsidiary of National Aust tralia Bank Limited (NAB), issued Innov vative Tier 1 hybrid securities comp
1
prising perpe etual non‐cu umulative sh hares totalling N
NZ$450 million in April 2008. The proposed offer structur delivered Tier 1 Capital for BNZ and re Innovative e Tier 1 Capital for the NAB (NAB, 20
008).
SUN ‐ Con nvertible P
Preference S
Shares (CPS
S)
Suncorp‐M
Metway Ltd. (SUN) issue Convertib Preferenc Shares (C
.
ed ble ce
CPS) to raise AUD$350 million in Jun of m ne
2008. The e SUN CPS h had similar characteristic cs as the ANZ CPS however carried a a margin of 320 basis po oints al for SUN (S above the e 90 day BBR
R. The CPS co onstituted No on‐Innovativ ve Tier 1 regu ulatory capita
Suncorp, 200
08).

8

MZM CONSULTING

AFF9260: MR
RCB: Regulatory Capital Funding Alternatives

Company

ANZ Banking G
Group Ltd.

Westpac Banking Corporation

Macquarie Group Ltd
d.

National Australia Bank
N
k

Sun ncorp‐Metway Ltd.

Issuer

ANZ Banking G
Group Ltd.

Westpac Banking Corporation

Macquarie Capital Lo oans Management
(as responsible entity y for the CPS Trust)

Bank of NZ Income Secu
B
urities

Suncorp‐Metway Ltd.

Security

Convertible Pre eference Share (CPS)

Stapled Preferred Security (SPS)

Convertible Preference Share (CPS)

Perpetual Non‐Cumulati
P
ive Shares

Con nvertible Preference Sha are (CPS)

Funds Rais sed > $500M

> $1,000M

$300M

$450M (NZD)
$

$35
50M

Issue Price e $100 per CPS

$100 per SPS

$100 per CPS

$1.00 per share
$

$10
00 per CPS

ASX Code

ANZPB

WBCPA

MGCPA

BISHA (New Zealand)
B

SUN
NPC

Issue Date

30 September 2008

30 July 2008

7 July 2008

28 April 2008
2

12 J
June 2008

Maturity

Perpetual

Perpetual

Perpetual

Perpetual
P

Perp petual Distributio ons Non‐cumulativ ve, fully franked, floating g rate (subject to o Payment Tests)

Non‐cumulative, f fully franked, floating rate (subject to Pa ayment Tests)

Non‐cumulative, fully fra
N
anked, fixed rate (subject to Payment Tests) r Non n‐cumulative, fully frank ked, floating rate e (subject to Payment Te ests) Rate: 2.50% + B
BBR p.a.

Rate: 2.40% + BBR
R p.a.

Non‐cumulative, unfranked, fixed rate th until 30 June 2013 a and floating rate thereafter (subject to o Payment Tests)

Rate: 9.89% p.a.
R

Rate e: 3.20% + BBR p.a.

Rate: 10.945% p.a.
Mandatory
y
Conversion
n

16 June 2014 (subject to conditions)

26 September 201
13 (subject to conditions) 30 June 2013 (subjec ct to conditions)

n/a n 14 J
June 2013 (subject to co onditions) Resale
Mechanism
m

Yes

Yes

Yes

n/a n Yes

Issuer Exch hange Optional after tax or regulatory event

Optional after tax x or regulatory event

Opt tional after tax or regula atory event

Mandatory after a and acquisition event

Optional after trust w winding‐up, tax or regulatory event

n/a n t
Mandatory after and acquisition event

Man ndatory after and acquis sition event

Mandatory after and acquisition event
Holder
Exchange

No right to req quest exchange

No right to reques st exchange

No right to request exchange

n/a n No right to request exchang ge Ranking on n Winding Up

Equal with preference shares

Equal with similar ranking capital securities Behind all creditors, a ahead of ordinary shares With ordinary shares
W

Equ ual with preference shares

Regulatory y Capital

Yes (Non‐Innov vative) Yes (Non‐Innovati ive) Yes (eligible NOHC Ca apital) Yes (Innovative)
Y

Yes (Non‐Innovative)

Table 3.1 ‐ Summary of recent re egulatory capital raisi ings for Australian AD
DI’s throughout 2008 (Source ‐ All informat tion sourced from rele evant companies PDS
S and links to these do ocuments are given in n section 7)

9

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3.3.

B
BOQ Capit tal Management Str rategy The Bank of Queensland (BOQ) is similar to the MRCB in their focus on the retail housing sector w k o
B
which accounts for over 60%
% of its curre ent loan boo ok. Similarly,
, BOQ also a applies the st or its tandardised approach fo hted asset m measurement t under Base el II. Fundamental to the BOQ capital management strategy is s the risk‐weigh following Board estab blished capita al targets (BO
OQ, 2008):


otal capital t target to be 1
11.0% with a a minimum o of 10%
To



Ti ier 1 capital target range e to be betwe een 7% to 8%
%



Ti ier 1 capital consisting of f up to 20.0%
% hybrid capital instrume ents 29 February 2008 is sho
The regulatory capital position of f BOQ as at 2 own in table 3.2. Total ca apital was 10
0.8%
1 capital was s 7.4%. BOQ has $56.6m excess Innov vative hybrid d instrument ts that are cl lassified as T
Tier 2 and Tier 1 capital an deductio amounting to $654 .9m, both these have significantly impacted the total ca nd ons t t apital position. To overcom these con me ncerns BOQ undertook a hybrid issu in Decem a ue mber 2007 to raise $200m of o m vative Tier 1
1 capital.
Non‐Innov
Capital Adequa acy Qualifying Capi ital Tier 1 apital Issued ca
Employee
e benefits reserv ve Retained profits
Hybrids (RePS, S1RPS & P EPS)
Estimated DRP uctions less Dedu
Total Tier 1 Cap pital Tier 2
General r reserve Term sub bordinated debt
Excess Tier 1 Hybrids
Total Tier 2 Cap pital Total Qualifying Capital
Risk Weighted Assets
Total Risk Weig ghted Assets
Risk Weighted Capital Ratios
Fundame
ental Tier 1
Residual Tier 1
Total Tier 1
Tier 2
Deductio
ons
Total Regulatory Capital

29 Feb 20
008 ($m)

1,188.4
19.5
164.9
249.0
12.0
(654.9)
978.9 128.2
311.0
56.6
495.8
1,436.0 1
13,242.3

5.5%
1.9%
7.4%
3.7%
(0.3%)
10.8%

Table 3.2 ‐ R
Risk weighted c capital ratios for BOQ as at 29 February 2008
8 (Source ‐ BOQ,
, half yearly pro ofit announcem ment February 2
2008)

From a l long‐term p perspective, the key str rategies tha BOQ has adopted as part of it active ca at s ts apital ment are sho own in table 3.3. The k programs include th securitisa e key he ation of housing and lea asing managem

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he ividend reinv vestment plan (DRP), th issue of h he hybrid instru uments, offshore assets, th maintenance of its di subordina ated debt, an nd ongoing rights issues.
The secur ritisation pro ogrammes have proved successful in reducing BOQ’s risk w h i weighted assets. It is no oted, however, that the res sidential hou using loan pr rogram has n not issued any securities s in 2008 wh hich is attributed the collap with the residential mortgage b pse e backed securities market due to the sub‐prime crisis. The debt e issuances, although al llowing for such purpose es, are not se een to have c contributed t to regulatory y capital as y yet. Date

Instrument

Descrip ption Dec 2007

Hybrid ‐ PE
EPS

Perpetu ual Equity Prefere ence Shares (PEPS) raised AUD$20
00 million of new w capital at a cost of 2.00% above t the bank bill rate. oceeds of the offe er of BOQ PEPS in ncreased BOQ’s n non‐innovative tie er 1 capital and w was be used to fund
The pro further growth of its bus siness. Dec 2007

Euro Medium e Term Note

Euro Medium Term Note e is an offshore m medium term not te programme wh here the aggregate nominal amou unt of
Notes o outstanding woul d not at any time e exceed US$3,50
00 million
It is anticipated that this s will act as an on ngoing facility for BOQ to raise var rious forms of debt that may be ed at regulatory c capital (i.e. subordinated debt) classifie November
2005

Debt
Instrument
t
Programme

bt Instrument Pro ogramme (DIP) established for BO
OQ under which t transferable depo osits and
The Deb subordinated or unsubo ordinated debt ins struments could be issued up to a a maximum aggre egate amount of
AUD$2,
,000 million.
The net t proceeds of any y issue of Instrum ments will be used d by the Issuer for r general financin ng purposes.

Annually since 2005

REDS EHP d Securitised
Asset

Rights Issue

Nov 2004

HP is a securitisat tion programme established and m managed by BOQ
Q for the purpose e of securitising $A
REDS EH denomi inated Equipmen nt Finance receiva ables. The 200
04 Share Purchas se Plan offer gave e shareholders the opportunity to subscribe for up to AUD$5000 wo orth of new BOQ shares.

REDS EH
HP securitisation offers have been n undertaken on an annual basis s since 2005. In 200
08 AUD$628 million of automo obile and equipm ment backed comm mercial hire purchase contracts an nd finance leases s were offered.

of 35% of shareh holders took up th he opportunity an nd raised more th han AUD$50 million in new capita al. A total o
October 2003

Hybrid ‐ S1
1RPS

Series 1
1 Reset Preferenc ce Shares (S1RPS)
) raised AUD$25 million of new ca apital at a cost of 2.00% above the e 5 year sw wap rate.
The pro oceeds of the offe er of the BOQ S1R
RPS increased BO
OQ’s innovative tiier 1 capital and w was be used to fu und the acquisition of UFJ Fin nance Australia L
Ltd.

May 2003

Rights Issue

The 200
03 Share Purchas se Plan offer raise ed AUD$24.7 million to fund the B
Bank’s ongoing gr rowth. The offer w was taken up by 25% of the B
Bank’s sharehold ders. Annually since 2002

REDS d Securitised
Asset

programme estab blished and mana aged by BOQ for the purpose of securitising $A
REDS is a securitisation p inated residentia l housing loans. denomi October 2000

Hybrid ‐ Re ePS REDS se ecuritisation offer dertaken on an an nnual basis since 2002 with two o offerings made rs have been und through hout 2007. Note t that no offer has yet been made in 2008.
Reset Preference Shares s (RePS) raised AU
UD$100 million o of new capital at a a cost of 1.90% above the 5 year s swap rate. oceeds of the offe er of the BOQ RePS increased BOQ
Q’s innovative tie er 1 capital and w was be used to fun nd The pro the furt ther growth of its s business

Table 3.3 ‐ h highlights of BO
OQ capital raisin ngs and securit tisation program mmes since 200
00 (Source ‐ this s information w was sourced from the
BOQ websit te and a link to this is provided d in section 7)

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3.4.

C
Current Market Env vironmen nt

The well publicised c current mar rket conditio (commo ons only referred to as the ‘credit crisis’) are having a d t impact on the capital r raising enviro onment for A
Australian ba anks. There h rapid widenin ng in significant has been a r spreads o a broad range of de securitie s, increased volatility in financial m on ebt d n markets, and a consider d rable tightening of funding conditions for financia institutions. Aspects worth factor g g al w ring in to an capital raising ny decision include: of Securitis sation Mark kets Closure o
The capac city for bank ks to sell assets via the s securitisation n markets ha as been wide ely used in t the managem ment of capital over the pa decade. This has les ast ssened the need for ban to devellop a capital buffer to c n nks l cover ons ate t his s o fluctuatio in the ra of asset growth. Th option is largely closed off for the time being due to the aforemen ntioned mark ket condition ns (APRA, 200
08).
Re‐interm mediation There has s been consid derable re‐in ntermediatio on of credit into the bank king sector a as the capital l markets rem main difficult and/or expen nsive for corp porations to raise capital. This reliance on the ba anking sector for funding g has created a spike in cred dit growth, b but it remain ns to be seen n whether it w will be long‐llasting (APRA
A, 2008). r Appetite
Investor
nt sub‐prime related announcements s by two maj jor Australian banks have e raised concerns of inve estor The recen readiness s to absorb f further debt related or h hybrid issues. Although not being se een as a pru udent metho od of share prices, these conce erns have se een banks in international markets b being raising capital given the current s as a source o of regulatory y capital (Buh hrer, 2008) . forced to undertake rights issues a

4.

M
MRCB Fun nding Alt ternative es

There are many chall e lenges currently being fa aced by ban in their attempts to raise regulatory capital. The nks a oversubsc cription expe erienced dur ring the rece ent public iss sues by Aust tralian ADI’s however de emonstrates that investor e enthusiasm s still remains f for appropri ately risk we eighted securities.
The MRCB
B is correct t to recognise that the use e of offshore capital raising and secur ritisation has s all but drie ed up for the tim me being. Ad dditionally, th he use of a r rights issue is s not seen as s necessary f for MRCB giv ven their cred dible business model and r relatively loy custome r and shareh yal holder base. Utilisation of this loyal base to fur
.
l rther the effective eness of its cu urrent DRP p program, wit th the possib bility of havin ng it underwritten, is the e first enhance t approach that should be considered by MRCB
B.
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of public or private issue es there are many instru uments whic ch deviate fro om a straigh ht debt or eq quity In terms o issue whic ch classify as s regulatory capital. The ese are partic cularly beneficial to com mpanies who need regula atory funding but are reluct tant to issue new equity as dilution i is prohibitive
e. As such, th hree funding g alternatives s are d to MRCB as s sources of regulatory c apital: presented 

Convertible Preference Sh hares 

ubordinated Debt ‐ Float ting‐Rate No otes Su



Co onvertible Bonds/Notes

Although terms and c conditions of f each instru ument are di iscussed there are a mulltitude of variations that t can d and the instruments st till be classif fied as regulatory capital. These disc cussions should thus be used be utilised as a guide e to the instr ruments mos st common f form in recen nt ADI regula atory capital raising.

4.1.

C
Convertibl
le Prefere ence Shar res The first a alternative o Convertible Preferenc Share (CP is based on the curre ANZ issu and would be of ce
PS)
ent ue classified as Non‐Inno ovative Tier 1 capital. H
Holders of th instrumen receive fu franked, preferred, non‐ his nt ully , ve, o f s t cumulativ floating rate distributions. Con version into a variable number of ordinary shares is at the discretion n of the issue er if conversion condition ns are satisfie ed. Key featu ures of CPS i nclude:
Distribut
tion Margin n The ANZ distribution margin of 250 bps abo the 90 day BBR was established through th book buil
2
ove d s d he lding Given ANZ is AA rated by y Standard & Poor’s (S&P
P) and that M
MRCB is BBB r rated it is fair to assume that process. G the floatin ng rate marg gin would be e in the vicin nity of 315 b basis points a above the 90
0 day BBR. T
The exact ma argin would be determined through the e process of book buildin ng (Aegis, 200
08).
ate could be used resembling the Ma acquarie issu ue of July 20
008 which re esulted in a f fixed distribu ution A fixed ra rate of 10
0.945% (Mac cquarie, 2008
8). Given the e recent RBA
A decision to reduce the cash rate by y 25 basis po oints, signals ar appearing of a chang in focus in monetary policy whe further easing is ex re g ge y ere xpected. As such establishing a fixed ra ate is not recommended. ds Dividend
CPS holde ers receive precedence o over ordinary y share holde ers in relatio on to dividen nds. For the i instrument t to be classified at Tier 1 c capital howe ever the div vidend needs to be non n‐cumulative (APRA, 20 e 008). Being non‐ cumulativ ve there is no obligation to pay divid dends and if f the dividen nd is not paid d in full for a particular year the un‐pa amount does not ro over. If a dividend is not paid a restriction is usually applied lim aid oll n miting distributio ons, or redem mption of ins struments, t o only those e instruments s of higher ra anking (ANZ,
, 2008).

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MZM CONSULTING

To classify y as Tier 1 (n not including g Innovative)
) the issue is s required to o be perpetu ual and conve ersion is to b be at the discre etion of the issuer (APRA
A, 2008). CPS s do not hav ve a fixed ma aturity date a as they conv vert into ordi inary shares. Co onditions ar required to be met b re t before conve ersion, which are establiished to ens h sure CPS hol lders receive a value of ordinary shares in excess of f the CPS sub bscription pri ice. Mandator ry conversion may not occur if the o ordinary shar re price dete eriorates sign nificantly. If t this is the ca ase it is possible e (subject to o APRA appro oval) for the issuer to ele ect to redeem the CPS fo or cash. It is also typical that the issuer r establishes a resale mechanism tha at gives the right to acquire all the CP
PS on issue fr rom holders by a third part ty on the mandatory conv version date e (ANZ, 2008). ng‐Up Ranking on Windin not a deposi it liability an nd payment o on resale or redemption n is not guara anteed. CPSs s are not sub bject CPSs are n to the dep positor prote ection provis sions of the B
Banking Act and as such in the event t of a winding g‐up CPS hol lders will only b be entitled t to claim a liq quidation am mount for each CPS. If there is a shor rtfall of fund ds on windin ng‐up there is a risk that CPS
S holders will not receive e the full part of the liquidation value e (ANZ, 2008
8).
lications
Tax Impl
The CPS w would be cla assified as equity interes such that payment of dividends and any Gross‐Up Amo sts o ounts payable o on the prefer rence shares s will be fran nkable distrib butions. Whe ere classified d as a qualified person (if the security is s held for ov ver 90 days during the d dividend per riod) the inve estor may q ualify for tax x offsets. Sale of the CPS th hrough an on n‐market transaction or t through an issuer enforc ced resale m echanism would constitu ute a
Capital Ga ains Tax (CG event for the investo Conversion into an ordinary sha should not give rise to a
GT)
o are n or. capital gain or loss for r an investor r nor should a
ANZ, 2008). any amount be included as assessab le income (A

4.2.

Subordina ated Debt ‐ Floating g Rate Note

The secon alternativ to be con nd ve nsidered is a Floating Rate Note (FR a RN). A FRN is usually in the form o an n of unsecured d, perpetual, floating rat te subordina ated note an nd is based o on a $300m iissue by Allco Finance Group
Ltd (AFG) in August 2007. Prior to this FR
)
r
RNs were us sed quite extensively d during 1998 and 1999 with companie es such as NA
AB, Suncorp p‐Metway, A delaide Bank and Macquarie Bank a all issuing FR
RN’s that are e still trading on n the ASX. Th his instrument would be classified as s Upper Tier 2
2 capital and d key feature es include:
Interest Rate oup issue wa as not assign ned a credit rating and w was issued at t 210 basis p points above e the
The Allco Finance Gro
BR
008). Using this informa ation, the re ecent increas in credit s se spreads and the assump ption 90 day BB (Aegis, 20

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CB has a BBB
B rating it is r reasonable t to consider t that the inte erest rate wo ould be in th he vicinity of f 250 that MRC basis poin nts above 90 day BBR. Th he exact marg gin would be e determined d through th he process of f book building.
Subordin
nation
Subordina
ated Notes a are designed to absorb lo osses where the Company would not t otherwise b be solvent. N
Notes
thus rank after all ot k ther secured creditors o the Comp d of pany including other su ubordinated creditors un nless ary expressed otherwise. On a win d nding up th e Notes wo ould rank above ordina shares and conver a rtible preferenc ce shares (Allco, 2007).
Interest Payments/
/Deferral
payments are e typically made either q uarterly or s semi‐annually. It is usual that FRNs in nterest paym ments Interest p involve co onditions tha at allow defe erral of paym ment only if the Company y has resolve ed not to pay y any dividen nd on its ordinary shares an nd preferred shares. Unli ke CPSs the interest pay yments on FR
RNs are typically cumula ative, that if a pay yment is missed the inte rest shall ac ccumulate an nd be paid o on the next interest paym ment meaning t date (Suncorp, 1998). ent of Princ cipal Repayme
To classify as Upper T 2 capita the instru ment must be perpetua As a perp y Tier al al. petual note the issuer is not s required to repay, re edeem or repurchase an Notes at the request of the Note ny eholder. It is typical tha an at m a Note wit thin a period d of five years from the issue date o of the Note. After this 5 year issuer will not redeem om APRA an issuer may r redeem all or some of th e Notes on issue by repa aying period and with prior approval fro value to inve estors (Allco o, 2007). This s can also be achieved t through purc the open ma arket chasing on t the face v however liquidity issu ues usually re ender this ine effective. lications
Tax Impl
FRN’s are treated as traditional securities f the purp e s for pose of the Income Ta Assessment Act 1936 for ax 6 investors other than s share trader rs. This mean ns that Note es will not be e subject to the capital g gains tax reg gime, gains on disposal of Notes will be taxable as income (with no in ndexation) a and losses will generally be w y her income (Suncorp, 19 98). deductible against oth

4.3.

C
Convertibl
le Bond/N
Note

The final security dis scussed is a convertible bond/note This instru e e. ument incor rporates the benefits of the f two instrum ments and is based on a $600m priv vate placeme by NAB to Deutsche Bank in Au ent e ugust previous t
2007. Ben ndigo Bank is the only financial ins stitution tha currently has a conve at ertible note on issue that is publically the ASX (Aeg gis, 2008). De epending on n the charact teristics this instrument can be class sified traded on t r Upper Tier 2 capital. as Innovative Tier 1 or
15

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Interest Rate private place ement was is ssued at 100
0 basis points s above the 90 day BBR (
(NAB, 2007). This rate w would The NAB p have been n low due to o its short ter rm (only 1 ye ear before co onversion) and the fact iit was privately placed. U
Using
this inform mation it cou uld be assum med that an M
MRCB public c issue would d be set in th he vicinity of f 200 basis po oints above the e 90 day BBR
R however th his would be dependent o on the terms s of arrangem ment. Although this type of instrument incurs a low interest ra the inve f t w ate, estor is com mpensated with the abilit to ty he bond into o ordinary sh hares at a dis scount to the e stock's market price. Fr uer's perspec ctive, convert th rom the issu the key be enefit of rais sing money b by selling con nvertible bon nds is a reduced cash inte erest payme ent. Subordination
To be clas ssified as regulatory cap pital it is req quired that the instrume ent be subor rdinated to a all other secured nditions wou creditors (APRA, 2008
8). As such t the same con uld apply as for FRNs. O
On conversion they would be ong with ord dinary shares
s.
ranked alo
Conversi
ion
Conversio
on at the sole e discretion of the issuer r is required if the instru ument is to b be classified as Tier 1 (ex xcept Innovative If conver
e).
rsion occurs at the discr retion of the holder and the issuer then the ins e d strument can be classified as Innovativ ve Tier 1 or T
Tier 2 capita al (APRA, 200
08). Conversion at the diiscretion of the issuer w would imilar condit tions as thos se discussed for the CPS. Where conv version is at the holders discretion t there contain si is usually a fixed num mber of shar or dollar value estab res blished (i.e. a 1 for 1 bas or a valu below cur a sis ue rrent
VWAP). These terms g generally pro ovide incentiives for holders to wait u until an issue er conversion n occurs. lications Tax Impl Convertib ble notes are e treated as t traditional se ecurities for the purpose e of the Incom me Tax Assessment Act 1
1936
for invest tors other th share tr han raders. This means that Notes will not be subjject to the capital gains tax t s regime, gains on disposal of Note es will be tax xable as inco ome (with no o indexation)
) and losses will generall ly be deductible against oth to a her income (Suncorp, 19
998). Conver rsion into an ordinary sh hare should n not give rise r an investor r nor should a any amount be included as assessab le income. capital gain or loss for

5.

R
Recomme
endation

All three alternatives demonstrat te distinct ad dvantages to o both MRCB
B and its pot tential invest tors. Conver rtible ce
CPS) have be widely used by AD througho 2007/08 so investor familiarity and een DIs out 8
Preferenc Shares (C willingnes to engage in such an issue is like Terms of the instrum ss e ely. f ments are su uited to the issuer while the e 16

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y shares attr racts many investors. CP
PS do howev ver incur the e most expen nsive potential to convert into ordinary on with it anticipated at approximate ely 315 basis s points abov ve the BBR. distributio Floating R
Rate Notes (
(FRN) offer a subordinat debt issue that wou not requ conversion into ordi a ted uld uire inary equity at any stage. U
Unlike CPSs th he interest p payments on FRNs are cu umulative an d are thus cl lassified as T
Tier 2 capital. Th hey are likely y to incur a d distribution of 250 basis s points abov ve the 90 day y BBR. Their r key weakne ess is their lack of popularity amongst existing issu uers which could be driv by the n c ven need for Tier 1 capital o by or sentiment. Irrespective of the rece publicity of Allco Fin ent nance Group their FRN issue could be p, N d investor s classified as a relative failure by investors g iven the instrument was issued at a face value of $100 an is e nd
12.50.
currently trading at $1
Note issue combines the relative st c e trengths of both the pre evious instru uments for both
A Convertible Bond/N d potential i investors. A low interest t rate (at 200 basis points above BB
BR) benefits MRCB whilst t the
MRCB and investor is compensated by the ability to con a nvert them into ordinary shares at a later date. If conversio is on a ed scretion of the issuer th would als be able to be classifiied as Non‐Innovative Tier 1 t his so maintaine at the dis capital. T
The key con ncern with these instru t uments how wever is the lack of m arket activit in their area e ty throughout 2007/08 e especially with the closin ng of international debt m markets whe ere the majo ority of issues s are en. undertake
Taking these points in nto consider ration the ke ey decision c criteria used d to formulat te a recomm mendation in n the current m market enviro onment is inv vestor willing gness to sub bscribe to an issue. Given n the recent activity with h CPS and the relatively com mparable financing costs s in relation to the other instrument ts it recomm mended to M
MRCB
: that they: ke a public is ssue of Conv vertible Prefe erence Share es with term ms and condiitions that m mirror the re ecent Undertak
ANZ CPS issue ‐ i.e. a fully frank a ked, preferre non‐cum ed, mulative, floa ating rate co onvertible preference share p g as Non‐Inn novative Residual Tier 1 C
Capital
qualifying

6.

C
Conclusio
on

The changes within t regulato environm the ory ment have altered the dynamics of ADI capital managemen in d nt relation to o having a significant im o the amoun nt of regulat tory required
d. Current m market condit tions are also mpact on the ca apital raising environme for Austr g ent ralian banks with the closure of sec curitisation markets, the re‐ e intermedi iation of cred dit into the b banking secto or enthusias m for debt in nstruments. or and a changed investo

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hese aspects into consideration it is recomme s ended that MRCB unde ertake a public issue o an of Taking th appropria ate convertib ble preferenc ce share suc ch that it wo ould be classified as Non‐
Tier 1 regula atory ‐Innovative T capital. Co onvertible preference sh hares offer fa avourable te erms to the issuer while t the potentia al to convert into ordinary shares attra acts many investors. It is anticipa i t ated that th issue wo his ould incur a distribution of a approximately 315 ba asis points ab bove the BBR
R (subject to the book bu uilding proce ss). factor in making this rec commendati on is ensuring investor demand for the issue. Recent issue by r es
The key f most major Australian n ADIs and some of their r regional co ounterparts s should provid
MRCB
de confidence that an M issue wou uld be welcom med by investors.

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7.

R
Reference
es

Aegis Equ uities Holding gs Pty Ltd. (2008). Austra alian hybrids research: Ju uly 2008 mon nthly review. Sydney. Aut thor. Allco Finance Group. (
(2007). Allco o notes: Prosp pectus NZ CP
PS investor presentation.. Retrieved fr rom http://ww ww.allco.com m.au/present tations_med dia.aspx?m=1
115

n l n doption of IF standar
FRS
rds: Prudent implicat tial tions.
Australian Prudential Regulation Authority. (2004). Ad
Retrieved
d from http://w www.apra.go ov.au/ADI/up pload/Adoption‐of‐Intern national‐Fina ancial‐Repor rting‐ s‐Prudential‐ ‐Implications s‐Overview‐P Paper.pdf
Standards

n ponses to su ubmission: A
Adoption of IFRS standa ards: Australian Prudential Regulation Authority. (2006). Resp
Prudentia
al implication ns Tier 1 capi ital and secu uritisation. Re etrieved from m http://ww ww.apra.gov.au/ADI/Basel‐II‐implem entation‐in‐A
Australia.cfm
m n
2007). Discu ussion paper: Capital ade
:
equacy for ADIs and gen
A
neral
Australian Prudential Regulation Authority. (2 insurers. R
Retrieved fro om http://ww ww.apra.gov v.au/Policy/u upload/Discu ussion‐paper r‐capital‐July y‐07.pdf n
(2008). Capital managem ment: Steeriing a steady course thro y ough
Australian Prudential Regulation Authority. ( turbulent times. Retr rieved from http://www
w.apra.gov.au/speeches/
/Capital‐Man nagement‐St teering‐a‐Ste eady‐ Course.cfm n Prudential Regulation A
Authority. (2 008). The im mplementatio on of Basel II
I in Australia. Retrieved from
Australian
http://ww ww.apra.gov.au/Insight/u upload/Insig ht_Issue_2_
_2008_implementation_b
baselII_aust.pdf n Prudential Regulation A
Authority. (2
2008). Prudential Standard APS 110: Capital adeq quacy. Retrie eved Australian from http p://www.apra.gov.au/AD DI/upload/Fin nal‐APS‐110‐ ‐November‐2
2007.pdf

Australian Prudentia Regulation Authority (2008). Prudential Standard AP 111: Ca n al
y.
P
S
PS apital adequacy
Measurem
ment of Capi ital. Retrieve ed from http:
://www.apra
a.gov.au/ADI
I/upload/APS
S‐111‐Nov‐0
07.pdf

aland Bankin ng Group Ltd
d. (2008). AN
NZ CPS investo or presentat tion. Retrieve ed from
Australia and New Zea http://ww ww.anz.com/
/aus/shares/
/CPS‐Offer.as sp Queensland L
Ltd. (2008). P
Profit announ ncement for the half‐year ended 29 F
February 200
08. Retrieved d Bank of Q from http p://www.boq q.com.au/sha areholder_ca apitalraisings.htm Queensland L
Ltd. (2008). C
Capital Raisin ngs. Retrieve ed from
Bank of Q http://ww ww.boq.com.au/shareholder_capital raisings.htm 19

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al nts. on: ng ? from Bank for Internationa Settlemen (2008). Securitisatio was the tail waggin the dog? Retrieved f ww.bis.org/speeches/sp0 080602.htm http://ww olicy lessons f from the recent market t turmoil, Retr rieved from
Bank for International Settlements. (2008). Po http://ww ww.bis.org/speeches/sp0
080523.htm

tember 15). Credit Woes s highlight hy ybrids, The Australian Fin nancial Revie ew, p20.
Buhrer, K. (2008, Sept . (2008). Macquarie conv vertible prefe erence securities PDS. Re etrieved from m Macquarie Group Ltd. http://ww ww.macquarie.com.au/au/about_ma acquarie/inve estor_inform mation/macq quarie_CPS_2
2008.htm

Australia Ban nk. (2007). ASX announce ement: natio onal converti ible note issu ue. Retrieved d from
National A http://ww ww.nabgroup
p.com/0,,919
975,00.html?
?PageNumber=8

Australia Ban nk. (2008). A
ASX announc cement: BNZ Hybrid tier 1 capital issu
Z
ue announce ement. Retrie eved National A from http p://clients.we eblink.com.a au/clients/na ab/article.asp p?view=3295 5657 Metway Ltd. (1998). Pros spectus: Floa ating rate cap pital notes. R
Retrieved fro om Suncorp‐M http://ww ww.suncorp.c com.au/sunc corp/shareh olders/share es_information/sunhb.as spx Suncorp‐M
Metway Ltd. (2008). Sunc corp CPS: 14
4 May 2008 s supplementa ary prospectu us. Retrieved d from http://ww ww.suncorp.c com.au/sunc corp/shareh olders/conve ertible_prefe erence_shar res_offer_pro ospectus.asp px Banking Corp poration. (20
008). Westpa ac stapled se ecurities: 18 J
June 2008 pr rospectus. Re etrieved from m Westpac B http://ww ww.westpac.com.au/inte ernet/publish h.nsf/Conten nt/WIICSS+W Westpac+SPS+
+Prospectus
s

20

AFF9260: MR
RCB: Regulatory C
Capital Funding Alternatives

MZM CONSULTING

8.

A
Appendic
ces

Append dix A ‐ Reg gulatory C
Capital De efinitions s

Regula atory Capital

Ti ier 1 Capital

≥ 5
50% Regulatory
Capital

Tier 2 Capital

≤ 25% Tier 1
Capital

Res sidual Tier 1 Ca apital Upper Tier 2
Fundamen
ntal Tier 1
Capital

Lo ower Tier 2

Non‐Innov vative Innovat tive ≤
≤ 15% Tier 1 Capital

apital
Tier 1 Ca
Tier 1 Cap pital compris ses the highe est quality co omponents that must sat tisfy all of the e following c characteristic cs:


Provide a permanent and unrestricted d commitment of funds



ailable to abs sorb losses
Are freely ava



Do not impose any unavoidable servic cing charge a against earnings
D



the claims of f depositors and other cr reditors in th he event of w winding‐up Rank behind t

ental Tier 1
1 Capital
Fundame
Includes o ordinary sha ares, retained d earnings, g general reserves, minority interests,, and current t year’s earn nings net of exp pected divide ends and tax x expenses
Residual
l Tier 1 Cap pital Includes all other ite ems qualifying for Tier 1 status including pu preferen r ure nce shares (non‐cumula
(
ative, irredeema vative capita able preference shares w without innov al features) a and other hy ybrid instrum ments Non‐Inno ovative Res sidual Tier 1 Capital
Comprises of an issue ed (either directly issued d or as a sta apled security) perpetua l non‐cumulative preference ere conversio on is at the d discretion of f the issuer subject to APRA approval . share whe

21

AFF9260: MR
RCB: Regulatory C
Capital Funding Alternatives

MZM CONSULTING

Innovative Tier 1 Capital any instrume ent which may contain a an incentive for the issue er to call (su uch as a step p‐up provisio on or
Includes a an option to convert into ordinary shares) a any instrument which is indirec issued th n and ctly hrough a special purpose v vehicle (SPV)
Tier 2 Ca apital apital that fa
Tier 2 Cap pital includes s other comp ponents of ca all short of th he quality of f Tier 1 capital but contribute to the ove erall strength of an entit ty as a going g concern. It is divided in nto Upper Tie er 2 capital a and Lower T
Tier 2
Capital.
ier 2 Capita al Upper Ti
Comprises of compon nents that ar re permanen nt in nature,
, including so ome forms o of hybrid cap pital instrum ments petual cumulative mandatory conve ertible notes and perpet s tual cumulat tive subordinated debt) and
(e.g. perp any Tier 1
1 capital amo ounts that ar re ineligible f for inclusion as due to the limits place fications ed on classif
Lower Ti ier 2 Capita al Comprises of compo onents that are not p permanent including te i erm subordiinated debt or limited life ble preferenc ce shares redeemab 22