APRA prescribes first dose of risk weight medicine to five banks

All major banks and Macquarie face a hike in the level of capital they must apply to home loans from July 2016 in a measure that moderates, but does not level, the competitive landscape between the bigger home lenders and smaller deposit-taking entities.

The Australian Prudential Regulation Authority yesterday announced an increase in the capital required for Australian residential mortgage exposures by authorised deposit-taking institutions accredited to use the internal ratings-based approach to credit risk. This is the Big Four plus Macquarie.

APRA said this change would mean that, for ADIs accredited to use the IRB approach, the average risk weight on Australian residential mortgage exposures would increase from approximately 16 per cent to at least 25 per cent.

APRA said it was "targeting an average IRB risk weight for residential mortgage exposures, measured across all IRB banks, of at least 25 per cent. IRB-accredited ADIs will continue to have a range of risk weights for individual mortgage exposures and portfolio segments. This means that capital requirements for IRB-accredited ADIs will remain sensitive to the specific risk characteristics of the ADI's mortgage portfolio."

It also said that, "broadly speaking, an increase in the IRB risk weight for Australian residential mortgage exposures from the current average of around 16 per cent to 25 per cent is the equivalent of increasing minimum capital requirements for the major banks by approximately 80 basis points."

For the four major banks the incremental capital consumed by this new policy will be around A$12 billion, credit ratings agency Fitch Ratings projected. Moody's Investors Service estimated a lower number of $10 billion.