APRA revises proposed regulatory changes for mortgage lending

The Australian Prudential Regulation Authority (APRA) has published its response to the first round of consultation on its proposed changes to the capital framework for authorised deposit-taking institutions (ADIs), which includes the loosening of capital requirements for low-risk owner-occupied, principal and interest home loans. 

The reform process commenced off the back of Basel III – a banking regulations framework designed to promote financial stability – and the Financial System Inquiry’s recommendation for ADI capital ratios to be “unquestionably strong”.

APRA stated that after reviewing the 18 submissions lodged by stakeholders during the first round of consultation, and after reflecting on the findings of a quantitative impact study it conducted, it has proposed to amend some of its initial proposals, which include:

• for residential mortgages, some narrowing in the capital difference that applies to lower-risk owner-occupied, principal-and-interest mortgages and all other mortgages
• more granular risk weight buckets and the recognition of additional types of collateral for SME lending, as recommended by the Productivity Commission in its report on Competition in the Financial System
• lower risk weights for credit cards and personal loans secured by vehicles

APRA chair Wayne Byres commented: “In setting out these latest proposals, APRA has sought to balance its primary objectives of implementing the Basel III reforms and ‘unquestionably strong’ capital ratios with a range of important secondary objectives.

“These objectives include targeting the structural concentration in residential mortgages in the Australian banking system and ensuring an appropriate competitive outcome between different approaches to measuring capital adequacy.”

Mr Byres stressed that APRA’s proposed changes are unlikely to disrupt the competitive balance in the mortgage market or limit access to credit, amid criticism from some stakeholders, which have claimed that the regulator has neglected competition concerns when making changes to the capital framework.

The Customer Owned Banking Association (COBA) recently published a report, which found that APRA did not give enough credence to competition risks when applying the internal ratings basis (IRB) method for calculating risk weights provided for under Basel II – a banking regulations framework designed to promote financial stability.

According to the report, under Basel II, credit and operating risk weights determined under the standard method were “much higher” than those under the IRB method used by the major banks.

In response to such concerns, Mr Byres said: “With regard to the impact of risk weights on competition in the mortgage market, APRA has previously made changes that mean any differential in overall capital requirements is already fairly minimal.  

“APRA does not intend that the changes in this package of proposals should materially change that calibration and will use the consultation process and quantitative impact study to ensure that is achieved.

“It is also important to note that the proposals announced today will not require ADIs to hold any capital additional beyond the targets already announced in relation to the unquestionably strong benchmarks, nor do we expect to see any material impact on the availability of credit for borrowers.”

COBA CEO Michael Lawrence welcomed APRA’s commitment to seek a balance between competition and financial stability.

“We note APRA’s commentary about the impact of the difference in risk weights for banking institutions using the standardised model compared to banks using the IRB model,” Mr Lawrence said.

“This commentary is a very welcome contribution to debate about levelling the playing field and removing competitive distortions in the regulatory framework.

“A critical further step in this process will be setting the capital floor for IRB banks that APRA intends to finalise in the second half of next year.”

The COBA CEO also welcomed APRA’s commitment to develop a “simplified framework for smaller, less complex banking institutions”.

APRA has opened the second round of consultation, with stakeholders invited to lodge submissions in response to its latest amendments.

Submissions close on 6 September 2019.

[Related: APRA accused of providing lending ‘fillip’ to majors]