Australia's bank regulator will force the major banks to hold billions more in capital

Getty/Cameron Spencer

In a major announcement this morning Australian banking’s prudential regulator (APRA) has materially increased the amount of capital that the major banks and Macquarie have to hold against their home loan lending books.

In a move which “addresses a recommendation of the Financial System Inquiry (FSI)” APRA says “the average risk weight on Australian residential mortgage exposures will increase from approximately 16% to at least 25%” for ADIs accredited to use the IRB approach.

The banks impacted are Australia and New Zealand Banking Group, Commonwealth Bank of Australia, Macquarie Bank, National Australia Bank and Westpac Banking Corporation — who up till now were able to use their own models to estimate the risk in their home loan lending mortgage books. That essentially allowed them to set the capital they needed to hold against their mortgage assets based on the implied risk from their internal models.

APRA says this is an important step in enhancing the resilience of the Australian banking system because “the residential mortgage portfolio is the largest credit portfolio for ADIs and, in aggregate, IRB accredited ADIs hold the material share of these exposures.”

APRA said these new measures will help the majors move toward the 200 basis points increase in capital called for last week.

This re-calibration of risk weights is likely to impact competition in the mortgage market with many submissions to the Murray inquiry reflecting a belief that less capital means the majors could out-compete smaller rivals.

The banks closed largely unchanged on Friday. So, even though the increase in capital from this measure has been telegraphed as part of APRA’s push for more big bank capital, investors will now need to evaluate the impact of the Majors and Macquarie potentially becoming less competitive and writing less loans than they have recently.

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