APRA alters plans for mortgage lending

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The Australian Prudential Regulation Authority (APRA) recently disclosed its response to the first round of consultation on its proposed changes to the capital framework for authorised deposit-taking institutions (ADIs).

The planned modifications include the easing of capital requirements for low-risk owner-occupied, principal-and-interest home loans; and started from Basel III – a banking regulations framework designed to promote financial stability.

ADIs that already meet the “unquestionably strong” capital targets that APRA announced in July 2017 should not need to raise additional capital to meet these new measures. Instead, the measures should reinforce the safety and stability of the ADI sector by better aligning capital requirements with underlying risk, especially with regards to residential mortgage lending.

The independent statutory authority received 18 industry submissions to the proposed revisions, and released a response, as well as drafts of three updated prudential standards such as APS 112 Capital Adequacy: Standardised Approach to Credit Risk; the residential mortgages extract of APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk; and APS 115 Capital Adequacy: Standardised Measurement Approach to Operational Risk.

Considering both industry feedback and the findings of a quantitative impact study, APRA is proposing to revise some of its initial proposals, including:

  1. some narrowing in the capital difference that applies to lower-risk owner-occupied, principal-and-interest mortgages and all other mortgages
  2. more granular risk weight buckets and the recognition of additional types of collateral for SME lending, as recommended by the Productivity Commission in its report on Competition in the Financial System
  3. lower risk weights for credit cards and personal loans secured by vehicles

 “In setting out these latest proposals, APRA has sought to balance its primary objectives of implementing the Basel III reforms and ‘unquestionably strong’ capital ratios with a range of important secondary objectives. These objectives include targeting the structural concentration in residential mortgages in the Australian banking system, and ensuring an appropriate competitive outcome between different approaches to measuring capital adequacy,” APRA Chair Wayne Byres said.

The latest proposals do not make any change to the Level 1 risk weight for ADIs’ equity investments in subsidiary ADIs.

In addition, Byres said that the plans would not require ADIs to hold any capital additional beyond the targets already announced in relation to the unquestionably strong benchmarks, nor do APRA expect to log any material impact on the availability of credit for borrowers.

 

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