Earlier this month Westpac surprised the market when it disclosed at its half-year results presentation that changes to the regulatory treatment of debt in non-banking subsidiaries could have a negative impact on bank capital ratios.The Australian Prudential Regulation Authority yesterday published its guidance on the issue, which is intended to help authorised deposit-taking institutions define the subsidiaries that are counted as "Level 2 groups".The guidance note said: "APRA is aware that small number of ADIs currently use debt raised from intermediate holding companies to reduce CET 1 [common equity tier one] deductions within the Level 2 group."The clarification does not restrict an ADI's external debt arrangements or stop ADIs achieving funding benefits from such arrangements. However, debt raised from intermediate companies cannot be used to reduce CET 1 deductions within the Level 2 group."ANZ issued a media release saying it had two debt issues, worth about A$400 million each, held by ANZ Wealth Australia Ltd. The bank said APRA's treatment would reduce its capital ratio by about 20 basis points.Commonwealth Bank said the APRA ruling would apply to $2.2 billion of debt within Colonial Group. The bank said the impact would be "minimal".CBA said: "The group's strong capital generation capabilities should ensure the orderly transition of existing non-recourse debt to equity funding."UBS banking analyst Jonathon Mott estimated that the Colonial Group debt was equivalent to about 66 bps of common equity tier one capital.National Australia Bank said National Wealth Management Holdings, which has $1.97 billion of debt, would be included in the Level 2 ADI group. The debt is equivalent to 53 bps of common equity tier one capital.UBS said Westpac was unaffected because it had no non-recourse debt in its wealth management business.UBS said the issue for the big banks was how the change would affect their ability to reach the common equity tier one capital ratio target of nine per cent by 2016, when they need to have systemically important financial institution buffers in place.It said CBA's strong capital generation put it in a comfortable position, while NAB would feel some pressure because of its "weaker organic capital generation" and ANZ also had to deal with a "lack of capital generation".