New capital adequacy rules introduced by the Australian Prudential Regulation Authority this year have reduced the credit risk weighted assets of the big banks and given their capital ratios a boost. This has prompted some fresh thinking about where the banks allocate their capital. The bank that reported the biggest impact was ANZ. The new capital framework had the effect of reducing ANZ’s risk weighted assets by A$34.5 billion, equivalent to 100 basis points of common equity tier 1 capital.  The most pronounced effect was in ANZ’s institutional division, where the reduction in risk weighted assets added 71 bps to CET1. ANZ chief executive Shayne Elliott said: “On a return basis, the ranking has changed. Institutional is no longer on the bottom. We are going to be allocating more capital to that division but it will not be dramatic.  “We will be looking to do more with the customers we already have. And we want to make sure this new environment is stable.” APRA’s new ADI capital adequacy framework (APS 110, APS 112 and APS 113) has been designed to embed “unquestionably strong” levels of capital. Higher capital buffers are the key change to the framework, which APRA says will provide more flexibility during periods of stress. Over half of banks’ CET1 capital will be in the form of capital conservation buffers, countercyclical capital buffers and, for some, domestically systemically important bank (D-SIB) buffers. Another key feature of the revised standard is change to the level of capital to be held for different types of loans. APRA has increased capital requirements for residential mortgages relative to other asset classes, given the high concentration in this asset, and created greater distinctions between higher and lower risk mortgage lending. Loans to owner-occupiers paying principal and interest are low risk, while investor loan and interest-only loans are higher risk. Mortgages with both an interest-only period of five years or more and a loan-to-valuation ratio above 80 per cent are classified as non-standard loans and require a risk weight of 100 per cent. Capital requirements for lending to SMEs have been reduced, with lower risk weights under the standardised approach. The threshold for defining retail SME has been raised from $1 million to $1.5 million in loan size. Elliott said the institutional business is focused on services, such as payments, foreign exchange and other processing services, and is capital-light. Less than half the bank’s institutional revenue came from lending in the March half. He said the changes will make the bank more competitive internationally. ANZ is gaining share among international institutional clients and it is looking to do more in that market, including increasing its work with governments. Among the other big banks that reported their half-year results over the past few weeks, Westpac reported that the change reduced its credit RWA by $23.7 billion, resulting in a 62 bps increase in its CET1 capital ratio. Westpac chief executive Peter King said the banks is “skewed to mortgages”, and among the bank’s strategic priorities he listed reclaiming Westpac’s position as a leading institutional bank and pursuing growth