Australia regulator lifts bank capital measure for home loans

APRA’s research suggested that a 200-basis-point capital increase might equate to the banks raising an additional $30 billion, meaning that 80 basis points may require $12 billion in extra capital to be raised by the big four and Macquarie.

“As a regional bank, Suncorp Bank is required to hold up to three times the level of capital of the major banks against equivalent portfolios with the same underlying risk”. However, he believes the large banks might maintain their interest rates and recoup their lower profits on mortgages via raising fees in their non-loan products.

Smaller banks already have a risk weighting of 35 per cent and have argued the status quo amounted to a competitive advantage for the major lenders. It’ll ultimately lead to lower returns for shareholders than would otherwise be the case.

The issue of capital holdings against residential mortgage exposure has had a high profile in recent months.

APRA’s movement on mortgage risk weights came exactly a week after it responded to the first recommendation of the inquiry.

However, under changes to be introduced by the Australian Prudential Regulation Authority on Monday, the major banks will be forced to put aside $7500 on loans of the same value.

Mr Murray’s interim report past year said “the increase in housing debt and banks’ more concentrated exposure to mortgages mean that housing has become a significant source of systemic risk”.

ANZ said the changes are likely to require an additional $2.3 billion in capital to cover its mortgage portfolio, however it described the estimated 55-basis-point increase in its capital position as “manageable” given the year transition period.

Westpac Banking Corp chief financial officer Peter King said the cost of holding more capital “will inevitably be borne by customers and shareholders”.

Such measures could include tightening lending standards, setting limits on particular types of higher-risk lending and forcing more aggressive banks to hold more capital, APRA said.

“After allowing for these initiatives, and if the impact of today’s APRA changes were effective immediately, on a pro-forma basis, the 31 March 2015 Westpac CET1 capital ratio would have been 8.5%”.

Commonwealth Bank of Australia told the ASX the change would increase the amount of common equity tier 1 capital required for Australian residential mortgages by approximately 95 basis points from July next year.

Macquarie Group, the only other lender to which the new rules apply, saw its shares rise 2 per cent after it said it could cover extra capital requirements from reserves. It said a market update would be provided at its annual general meeting July 23. The increase is being implemented through an adjustment to the correlation factor used in the IRB mortgage risk weight function for each affected ADI. It is not possible to settle on the final calibration between the IRB and standardised mortgage risk weights until changes arising from the Basel Committee’s broader review of this framework are complete.

That would go some way towards the 200-basis-point increase in major bank capital levels that APRA wants to see to ensure that Australia’s banks are in the world’s top quarter for safety.

CBA’s chief financial officer David Craig said: “In expectation of APRA’s recent announcements, CBA has been working on a number of options for managing our capital over the coming year”.