APRA's new capital rules might hurt bank profitability, but it's good for home loan borrowers

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APRA has announced big changes to the way it’s going to allow the big 4 banks, along with Macquarie, to calculate risk in home loan portfolio and the amount of capital all five need to hold if things go all GFC.

It’s an important change to both leverage and risk and increases financial stability . But it was also a recommendation of the Murray inquiry to increase competition in Australian banking

But, here’s a question.

Is it better for consumers that the big banks hold less capital and can outcompete nearly everyone else because of their ability to calculate the capital levels to hold against the mortgage books?

Or, is it better for borrowers, that the new rules APRA announced yesterday mean banks have to choose to be either less competitive or less profitable?

At the same time the smaller players, regional banks like Suncorp, Bendigo Adelaide, Bank of Queensland and the close to 100 members of the customer-owned banking sector (mutuals, building societies and credit unions) get a chance to compete on a more even playing field?

Most people might fall on the side of cheaper loans from the big 4 because that’s where most of Australia’s mortgages reside and that’s what they see and feel paying their mortgage each month.

It’s also the approach taken by Westpac yesterday, with chief financial officer Peter King saying that “more capital will inevitably be borne by customers and shareholders”.

That can’t be a good thing surely?

Mark Degotardi, CEO of COBA, the industry body for customer-owned banking, disagrees. He congratulated APRA for tightening the capital requirements and said:

This is a positive response to an important pro-competitive recommendation of the Financial System Inquiry (FSI). APRA’s decision on capital requirements for residential mortgages brings us closer to a level playing field in prudential regulation of the home loan market.

The FSI found that the current capital settings are giving the major banks a funding cost advantage and distorting the market.

Of course APRA isn’t doing this for competition, it’s doing it for financial stability reasons. To ensure a stronger and more resilient banking sector.

But the questions remain: is it healthier to have biodiversity in the economy with lots of medium-sized and smaller financial institutions competing with the big guys?Or, is it better for the landscape to be dominated by a few big players taking all the business they want?

The answer, for me, is obvious. Biodiversity wins everyday. It gives real choice, helps innovation, serves people who may otherwise fall through the cracks and, as long as the institutions are satisfactorily managed within APRA’s framework, consumers win.

That doesn’t guarantee the Majors won’t continue to be as competitive as they are now though. They may simply be happy to take a lower return in equity for shareholders, rather than be less competitive.

In the end that’s their choice. It’s also how the Australian economy needs to be structured. Opportunity of competition and choice for business owners and customers.

There is really no downside from APRA’s new rules.

Disclaimer: Greg McKenna is a director of Police Bank, a customer owned bank. He has worked in finance since 1986 including stints at Westpac and National Australia bank.

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