Banks face tighter capital rules for investor and interest-only loans
Banks that target property investors and customers taking out interest-only mortgages will face tighter capital requirements for these loans, under rules designed to deal with Australia's skew towards residential property lending.
The Australian Prudential Regulation Authority (APRA) on Wednesday responded to industry feedback on proposals to change how much loss-absorbing capital banks must hold against mortgages, the major banks' biggest assets.
APRA chair Wayne Byres said the changes aimed to target the banks’ “structural concentration” in mortgages.Credit:Louie Douvis
Under the proposal, which follows an earlier version from February 2018, APRA is narrowing the gap between the capital requirement for riskier investor loans, and lower-risk owner-occupier loans where the customer is paying principal and interest.
Even so, APRA chair Wayne Byres said the changes were still aimed at targeting the banks' "structural concentration" in mortgages, as well as making the system "unquestionably strong".
Mr Byres also said it aimed to ensure an "appropriate competitive outcome" for the sector, in comments that were welcomed by smaller, member-owned institutions.
Smaller competitors to the big four majors have long protested against the banks' more favourable capital treatment, though APRA's Wednesday proposal did not propose major changes on this front.
APRA stressed the changes, to take effect from 2022, would not lead to capital raisings from the banks.
The new framework will impose higher capital charges by increasing bank's "risk weights" — financial models that allow banks to assume their credit exposures are smaller than the actual dollar amount, depending on the riskiness of the loan.
Owner-occupied loans, where the customer is paying principal and interest and has substantial equity, would attract the lowest "risk weights" The highest "risk weights' would be applied to loans with a high loan-to-valuation ratio, especially investor and interest-only loans.
The changes are part of the regulator's implementation of the Basel III capital reforms, a set of rules devised to make the world financial system more shock-proof following the 2008 global financial crisis. APRA said that due to Australia banks' skew towards residential mortgages, it would impose stricter standards than the minimum under the Basel rules.
Of the big four banks, Westpac is the biggest lender to property investors.
Principal of consultancy Digital Finance Analytics, Martin North, said APRA appeared to be taking a lighter approach on mortgage capital than New Zealand, which plans to sharply increase capital requirements. "My overall sense is that they've turned the dial back," Mr North said.
Bell Potter analyst TS Lim said the market had been prepared for tighter capital requirements on residential mortgages, and the changes would have a limited impact on banks' lending behaviour in the short-term. "Growth-wise, everyone is just being very careful," Mr Lim said.
ANZ shares were down 1.4 per cent to $28.26, National Australia Bank was down 0.8 per cent to $27.01, Westpac down 0.9 per cent to $28.04, and Commonwealth Bank slid 1.3 per cent to $79.87.
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