APRA flags capital changes

  • By Kate Weber

APRA has released new capital guidelines for banks in its response to the first round of consultation on proposed changes to the capital framework for banks, with proposed changes to standards for home loans, small business lending and credit cards.

APRA first began revisions in February last year, which included two discussion papers for consultation with banks on proposed revisions to the capital framework.

Specifically, mortgage risks weights were to be recalibrated to distinguish between owner-occupier and investors,

Now, the package of proposed changes continues from the finalised Basel III reforms, as well as the Financial System Inquiry recommendation for the capital ratios of Australian ADIs to be 'unquestionably strong’.

After considering industry and feedback and the results of a quantitative impact study, APRA has now revised some of its early proposals, including residential mortgages, small business lending changes and lower risk weights for credit cards.

APRA is proposing to revise some of its initial proposals. For residential mortgages, it is proposing some narrowing in the capital difference that applies to lower risk owner-occupied, principal-and-interest mortgages and all other mortgages.

It is also looking at more granular risk weight buckets and the recognition of additional types of collateral for SME lending and lower risk weights for credit cards and personal loans secured by vehicles.

APRA stated the measures aim to reinforce the safety and stability of the banking sector by better supporting “capital requirements with underlying risk, especially with regards to residential mortgage lending.”

Revisions of the to the ADI capital framework will continue over the year and APRA expects to conduct one more round of consultation, intended to come into effect 1 January 2022.

This is following the Basel Committee on Banking Supervision’s internationally agreed execution date.

APRA chair Wayne Byres said that by setting out these latest proposals, APRA sought to “balance its primary objectives of implementing the Basel III reforms” and “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.”

Byers continued to say 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,” Byres said.