Australia’s prudential regulator said that authorised deposit-taking institutions (ADIs) accredited to use the internal ratings-based (IRB) approach to credit risk would have to increase the average risk weight on Australian residential mortgage exposures.
The increase would lift from approximately 16 per cent to “at least” 25 per cent, which equates to around 80 basis points. The move will take effect from 1 July 2016.
The move affects the big four banks as well as Macquarie Bank.
Regional lenders Bendigo and Adelaide Bank, BOQ, ME and Suncorp Bank all applauded the announcement.
“Standardised banks are already required to hold more capital (with average risk weights of 39 per cent) on their residential mortgage exposures. This remains unchanged,” a statement from the banks said.
“The regional banks, which have advocated for a set of financial system rules and regulations that would strengthen confidence in Australia’s financial system, believe this change is an integral step towards creating a more even playing field for all banks and will increase competitive neutrality in the market.”
APRA’s changes come after the Financial System Inquiry called for the average mortgage risk weightings on Australian residential mortgages to rise to between 25 per cent and 30 per cent.
Chair David Murray said this would provide a level playing field, as smaller banks that are not IRB accredited must hold more capital against mortgages.
The banks impacted by the changes emphasised their preparedness to adhere to the new requirements.
“Financial strength, including a strong capital position, is a pillar of CBA’s strategy. In expectation of APRA’s recent announcements, CBA has been working on a number of options for managing our capital over the coming year. We will provide more commentary on these announcements when we present our annual results on 12 August 2015,” CBA’s chief financial officer, David Craig, said.
In a statement to the ASX, ANZ said the increased average credit risk weight will require ANZ to “allocate approximately $2.3 billion of additional capital to the bank’s Australian mortgage lending book”.
“The impact to ANZ’s capital position of approximately 55 basis points is largely as expected following the Financial Services Inquiry and is manageable during the APRA transition timetable to 1 July 2016.”
NAB group executive of finance and strategy, Craig Drummond, said NAB was also prepared for the changes and that “aligns with our expectations”.
NAB's $5.5 billion capital raising initiative (announced in its first half of 2015 results) would provide a “buffer” for the regulatory changes.
Westpac chief financial officer Peter King said that the bank had already taken steps to boost its capital position, including “partially underwriting the first half [of] 2015 dividend reinvestment plan and the recent sale of shares in BT Investment Management”.
He added that Westpac was “well placed for this change”.
In its statement to the ASX, Macquarie said it would provide a market update at its AGM tomorrow, but noted that “as at 31 March 2015, Macquarie’s capital surplus was $A2.7 billion over [the] regulatory minimum requirement of 8.5 per cent”.