Yesterday 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 from approximately 16 per cent to “at least” 25 per cent from 1 July 2016.
This equates to around 80 basis points.
Bendigo and Adelaide Bank, BOQ, ME and Suncorp Bank welcomed 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 Services Inquiry called for the average mortgage risk weightings to rise to between 25 per cent and 30 per cent.
Chair David Murray said that this would provide a level playing field as smaller banks that are not IRB accredited must hold more capital against mortgages.
The big four banks, emphasised that they were prepared for the changes to capital adequacy requirements for residential mortgage exposures.
In response the CBA said that from 1 July 2016, the risk weightings of CBA’s Australian residential mortgages would increase to an average risk weight of at least 25 per cent.
“Financial strength, including a strong capital position, is a pillar of CBA’s strategy. In expectation of APRA’s recent announcements,” CBA chief financial officer, David Craig said, “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.”
In a statement to the ASX, ANZ said it planned to increase the average credit risk weight applied to Australian residential mortgage lending from 15 per cent to 25 per cent which 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,” ANZ said.
NAB group executive 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.
This includes “partially underwriting the first half [of] 2015 dividend reinvestment plan and the recent sale of shares in BT Investment Management."
Mr King said that Westpac was "well placed for this change"
