Risk weights fiddle a win for small banks

Big banks and also Macquarie Bank will have to deal with higher risk weights on home loans in the future, assuming the Australian Prudential Regulation Authority throws it support behind a key recommendation.

The final report of the Financial System Inquiry yesterday proposed to "raise average mortgage risk weights" for large banks modelling their own risk weights.

The average mortgage risk weight for an ADI using the standardised model is 39 per cent, more than twice the size of the average mortgage risk weight for banks using IRB models, which is 18 per cent.

"If this recommendation is adopted, APRA has indicated its strong preference is to narrow mortgage risk weights by raising IRB risk weights," the report said, an observation inviting the inference that APRA may readily adopt the measure.

"The required quantum of capital to achieve an average risk weight of 25-30 per cent would be roughly equivalent to a one percentage point increase in major banks' CET1 capital ratios from current levels. This corresponds with a small funding cost increase for the major banks," the report said.

The report proposed that APRA "narrow the difference between average IRB [for big banks] and standardised risk weights [for all other banks]".

"This should be achieved in a manner that retains an incentive for banks to improve risk management capacity," it said.

"In the inquiry's view, the relative riskiness of mortgages between IRB and standardised banks does not justify one type of institution being required to hold twice as much capital for mortgages than another.

"This conclusion is supported by the findings of APRA's recent stress test, which found regulatory capital for housing was more sufficient for standardised banks than IRB banks."