APRA tweaks risk weights on five banks
The five largest bank home loan funders may be able to trim their capital risk weighing, and maybe pricing, on home loans under a refinement to year-old rules outlined on Friday by APRA.In July 2015 APRA announced changes to the treatment of residential mortgages for banks able to use internal models for capital adequacy purposes (in other words, the four major banks and Macquarie).At the time APRA adjusted the risk weight calculation used and said it "was intended to increase the average risk weight on Australian residential mortgage exposures, measured across all [five banks], from approximately 16 per cent to an average of at least 25 per cent.'The increase in risk weights came into effect from July this year.APRA, in its Friday announcement, pointed out that it "also required [large banks] to make a range of other changes to their models as part of its routine supervisory processes."It said "the impact of these modelling changes, when combined with the adjustment proposed in July 2015, would have been an average risk weight that was well in excess of the 25 per cent risk weight targeted by APRA in its original announcement."APRA will now "recalibrate the adjustment advised in July 2015, with a view to ensuring the original target of an average risk weight for Australian residential mortgages of at least 25 per cent is achieved, while not significantly exceeding this target."The regulator elaborated that "this adjustment to mortgage risk weights remains an interim measure, pending the outcome of the deliberations of the Basel Committee on Banking Supervision to finalise reforms to the capital adequacy framework, and APRA's subsequent consideration of how those reforms should be applied in Australia. "In the meantime, APRA continues to target an average residential mortgage risk weight for IRB banks of at least 25 per cent."