APRA reforms to boost lending

Regulators have proposed a new set of bank rules designed to intensify competition and encourage billions in additional lending.

A composite image of signage of Australia's 'big four' banks ANZ, Westpac, the Commonwealth Bank (CBA) and the National Australia Bank (NAB) signage in Sydney, Saturday, May 5, 2018. (AAP Image/Joel Carrett) NO ARCHIVING

The prudential regulator has proposed a new set of rules for the nation’s banks, designed to intensify competition, encourage billions of dollars in additional lending to small businesses and support lower-risk home lending.

However, the rules penalise higher-risk lending and could curb banks’ appetite to lend to property investors and younger borrowers.

As part of a long-awaited package of reforms, delayed by the urgent implementation of measures to contain the economic fallout from COVID-19, the Australian Prudential Regulation Authority said banks were not expected to stampede the market to raise more capital.

In fact, the amount of capital sitting on their balance sheets is likely to increase under the rules, but only because of changes to so-called risk-weights — the amount of capital required to be held against loans.

However, small changes in risk-weight settings can have a significant impact on bank profitability and can influence the way that banks allocate funding for certain type of loans.

The proposed rule changes come on the heels of the release of the home loan pricing inquiry report by the federal ­government in October last year, which recommend­s that Canberra introduce a series of measures to allow customers to switch between lenders.

When the proposed APRA changes take effect from the start of 2023, the amount of capital set aside for home loans will depend more on the level of risk, including factors such as the purpose of the funds, the repayment profile and the proportion of debt, or the loan-to-valuation ratio.

Lower risk-weights will also provide additional incentives to lend to small businesses. APRA chairman Wayne Byres said the proposed reforms would consolidate the capital position of the nation’s banks, 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 towards recovery,” Mr 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 at 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.”

Jefferies bank analyst Brian Johnson said it was too early to calibrate the precise impact of the new framework.

However, to the extent that housing risk-weights increased for riskier loans, Westpac would suffer because it had a greater proportion of loans with higher loan to value ratios, Mr Johnson said.  Compared to its peers, investor loans were more dominant in its portfolio, he said. “And to the extent that risk-weights for lending to SMEs (small and medium-sized enterprises) go down, the changes are really good for National Australia Bank,” Mr Johnson said.

APRA’s announcement on its new capital framework came before the market closed.

Shares in Commonwealth Bank made the biggest adjustment, gaining $1.07, or 1.3 per cent, to $81.80, with Westpac retreating 13c to $21.04, and ANZ and NAB each lifting 6c to $23.40 and $23.31, respectively.

Westpac is scheduled to hold its annual meeting on Friday.

In 2017, APRA set benchmarks for bank capital adequacy that were consistent with the unquestionably strong requirement from the financial system inquiry three years before.

The industry was given until the beginning of this year to meet the benchmark, and it did so before the onset of COVID-19.

The regulator said in its ­discussion paper, released on Tuesday, that the economic impact of the pandemic had confirmed the importance and value of a resilient and well-capitalised banking system — one that could act as an absorber of economic stress and aid in economic ­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,” it said.

APRA aimed to achieve this in a number of ways.

First, given the dominance of mortgage lending on bank balance sheets, the regulator wanted to introduce a more risk-sensitive approach to such a key asset.

It also wanted to enhance competition by implementing a floor to limit the capital benefit obtained by larger, more complex banks from using their internal models to determine risk-weights.

The transparency and comparability of capital ratios used by Australian banks compared to their overseas peers would also be improved.

A simplified capital framework would also be applied to banks with less than $20bn in total assets, so that their regulatory burden would be lessened without any compromise to prudential safety.

APRA said reported capital ratios would inevitably change, given the extent of amendments across a range of dimensions.

“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,” the regulator said.

“Changing the presentation of capital ratios will not impact overall capital strength or the quantum of capital required to be considered ‘unquestionably strong’; but instead improves comparability, supervisory flexibility and international alignment.”