Newly announced APRA rules to boost lending

The Australian Prudential Regulation Authority has proposed new banking rules aimed at promoting competition, supporting lower-risk mortgage lending and encouraging billions of dollars in additional lending to small businesses.

However, the rules penalise higher-risk lending and could make banks more cautious about lending to property investors and younger borrowers, according to a report by The Australian.

The reforms were delayed by the implementation of measures to stem the economic fallout of the COVID-19 pandemic. APRA said banks were not expected to rush to raise more capital under the reforms; in fact, the amount of capital on their balance sheets is likely to rise under the new rules due to changes to risk-weights – the amount of capital banks are required to hold against loans.

However, small changes in risk-weight settings can have a big impact on profitability, and can influence how banks allocate funding for certain types of loans. The proposal comes after the release of a home-loan pricing inquiry report by the federal government that recommended the introduction of measures to allow customers to switch between lenders, The Australian reported.

Read more: Big banks are dominating this mortgage market

The proposed changes would take effect in 2023. Once the changes take effect, the amount of capital set aside for home loans will depend more on the level of risk.

Lower risk-weights will provide additional incentives for lending to small businesses. APRA Chairman Wayne Byres told The Australian the proposal would consolidate banks’ capital position and increase confidence in the system’s long-term resilience.

“The groundwork of previous years meant that when COVID-19 hit, the Australian banking industry had sufficient capital depth to support customers, maintain the supply of credit, and help the economy on its path toward recovery,” Byres said. “These proposed changes will embed the ‘unquestionably strong’ capital position that has been achieved by the banking sector into a regulatory capital framework that is more flexible and responsive in times of crisis. Progressing these reforms in a timely manner will deliver a robust, competitive banking system that can continue to fulfil its critical role when our community is confronted by the challenges of the future.”

In 2017, APRA set benchmarks for bank capital adequacy to align with the ‘unquestionably strong’ requirement from the financial system inquiry of 2014. The banking industry was given until the beginning of this year to meet the requirements, and did so prior to the onset of the pandemic.

In a discussion paper released on Tuesday, APRA said that the economic fallout from COVID-19 had demonstrated the importance of a resilient and well-capitalised banking system that could absorb economic stress and aid in recovery.

“While the banking sector has been bolstering its resilience, APRA has in parallel been undertaking a comprehensive review of the ADI capital framework, designed to improve its strength, flexibility, comparability and transparency,” the regulator said.

APRA outlined a number of strategies to achieve this resilience:

• Introducing a more risk-sensitive approach to mortgage lending
• Enhancing competition by implementing a floor to limit the capital benefit obtained by larger banks by using their internal models to determine risk weights
• Improving the transparency and comparability of capital ratios used by Australian banks compared to their overseas counterparts
• Applying a simplified capital framework to banks with less than $20bn in total assets in order to reduce their regulatory burdens

APRA said reported capital ratios would definitely change given the extent of the amendments.

“However, APRA remains committed to its previous position that a bank that currently meets the ‘unquestionably strong’ benchmarks under the current framework should have sufficient capital to meet any new requirements,” APRA said.