Why Australian Banks Need to Hold Additional Capital Reserves?
APRA (Australian Prudential Regulation Authority) had announced that it would raise average risk weightings for property loans by 4% from 16% to 25% from 1st July 2016. The move by the financial and banking regulating authority in Australia will increase capital reserve requirements by an average of about 80 basis points or A$12 billion. This would go towards the extra 200 basis points of capital reserves that APRA wants banks to hold so that their reserves are ranked among the top quartile of global lending bank.
The move made by APRA came after a recommendation of the government’s financial system inquiry in December last year that said it wants Australian banks to be ranked as the safest in the world when it comes to risks. The new loan standards will apply to big four banks in Australia, namely National Australia Bank, ANZ, Westpac, the Commonwealth as well as the Macquarie Group.
National Australia and ANZ Bank will need about A$2 billion additional capital amount each, while Westpac and Commonwealth Bank will need double of that amount.
Why APRA Wants Banks to Hold More Capital
Local bank’s exposure to the property market has been a growing concern for the government. Increased exposure to home market presented the prospect of return of the 2008 financial crises that caused great amounts of losses to both investors and financial agencies.
As a result, regulators put forward the new standards to reduce the risk of increased exposure to the property market and strengthen financial system in the country. Increased capital requirements of the bank is an attempt by the regulatory authority to hedge against any adverse movement in the property market values, which at the moment is in a boom period with 30% increase values since 2012. The new rules that would come into effect next year in 2016 will increase capital reserves requirements for four largest banks in Australia.
APRA’s move to tighten home loan standards down under has been expected by most experts. But what came as a surprise for most experts was the short time period to implement the new policy. Although, the new loan standards will not dampen property prices in the country by much, lenders with low capital will face difficulties in getting new loans.
Banks may meet additional cost of holding capital through retained earnings and stock plans that would require shareholders to swap part or all of their dividends for additional stocks. In both cases, investors or customers would have to face the cost of increased capital requirements.
APRA said that the increase in capital requirements conforms to the suggestions of BCBS (Basel Committee on Banking Supervision) that suggested making changes in global banking capital framework to make it safer and securer for the investors. The new standards will make the banking system in Australia more safe and resilient in the face financial meltdown.
You must contact a professional financial advisor to know more about the impact of the new banking requirements on your ability to obtain a property loan.