The Australian Prudential Regulation Authority (APRA) issued a new ruling Monday, July 20, mandating Australia's biggest banks to raise billions of dollars more in capital against potential mortgage losses from home loans.
The APRA ruling required large banks to raise average home loan risk weights from 16 percent to at least 25 percent by July 1, 2016, reports the Wall Street Journal. The home loan risk weight is a bank's capital requirement which will serve as a buffer against potential losses in their assets. The new mandate was issued following the results of a financial industry review conducted last year which recommended the increase of home loan risk weights to levels ranging from 25 percent to 30 percent.
In the report, WSJ also cited APRA's announcement that the new ruling is also an interim measure. It seems that changes may still be effected depending on the results of the review being conducted by the International Basel Committee on Banking Supervision.
The banks that will be affected by APRA's new rulings, reports Business World Online, are Commonwealth Bank of Australia Ltd., Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd., Westpac Banking Corp., and Macquarie Group Ltd. These banks will need to raise their minimum capital requirements by about 80 basis points, said APRA. This translates to an A$ 12 billion ($8.9 billion) increase in capital for Australia's four biggest banks, states the Goldman Sachs Group Inc., and Morgan Stanley. Goldman Sachs analysts Andrew Lyons and Yu Chuan Leong said in a statement that APRA's announcement comes as no surprise. However, the one year time frame given for banks to adjust their capital requirement is shorter than expected.
The Business World Online report also mentioned the reactions from the lenders, with Commonwealth Bank expecting a rise in the amount of common equity Tier 1 capital required for residential mortgages to approximately 95 basis points given the new ruling. National Australia remarked that its common equity Tier 1 ratio will be pushed back into a range of 8.75 percent to 9.25 percent, instead of the expected 10 percent ratio after increasing its capital requirements earlier this year. Meanwhile, ANZ Bank said an additional A$2.3 billion ($1.69 billion) will have to be allocated to its Australian mortgage lending book, while Macquarie said that they would look into existing capital surplus and retained earnings to meet the increased capital requirement.