APRA changes welcome, but not enough

by Madison Utley18 Jun 2019

While the head of an association that champions competition has welcomed the willingness of APRA to consult with the industry on the proposed changes to the capital framework for ADIs, he has reservations about the sufficiency of the revisions recently announced.

The regulator first proposed the strategy  to ensure all banks have adequate financial resources in the event of failure last November. After a consultation period resulting in 18 industry submissions, APRA amended its original proposition just last week.

CEO of the Customer Owned Banking Association (COBA), Michael Lawrence, explained his concern to Australian Broker.

He said, “APRA has been seeking to balance competition with financial safety, stability within the industry being the number one objective. In this most recent report, APRA made a point of looking at risk weighting with a broader perspective. We certainly welcome that, but still think we have some way to go. We still believe that there is too much of a differential in the risk weights between internal ratings-based (IRB) institutions and standardised institutions.”

Specifically, Lawrence has concerns about the possible ramifications of lower LVR brackets having lower risk weights and what are considered to be riskier mortgages receiving higher risk weights.

“One of the main questions is, now that there’s quite a sizable difference between lower LVR versus higher LVR – or less risky versus higher risk in the eyes of the regulator – will this bring about pricing for risk? We generally aren’t seeing that at this point in the marketplace, but is this something that will start driving ADIs to look at their pricing on higher LVR loans and price them differently?"

While gravitating towards risk-based pricing isn’t inherently negative, it does have at least one significant drawback.

“It’s the consumer that pays. Think about your first homeowners. They’re obviously in the higher LVR brackets and, if we get to that pricing for risk, they’ll potentially have to pay more. It’s tough entering the mortgage market in the first place. If they have to pay more for it, that’s going to put added pressure on the first home buyer market,” Lawrence explained.

“There’s still work to be done. APRA said this isn’t to be viewed as a definitive final proposal, and that it may be subject to recalibration. We’ll continue to work with the regulator. We’ll put another submission in,” he added.   

One pressing concern that COBA plans to address in its follow up submission is what it has perceived as a very real threat to competition.

Lawrence elaborated, “What remains a risk for our sector is the problem of the major banks – the IRBs – cream skimming the lower risk weight home loans because they’re in a better capital position to do so. They could be very aggressive in the low LVR space, which would potentially push the rest of the sector into the higher LVR brackets as they can’t compete with an aggressive campaign from the majors.”

APRA has communicated that it expects another round of consultation before the revisions are scheduled to go into effect as of January 2022.

“For anyone running an ADI, managing capital is imperative because it’s the costliest form of funding. Therefore, it adds to the cost of providing a mortgage. Where this all lands is very important, and it’s pleasing that these complex initiatives are not just rushed into, and that there have been a number of consultations between APRA and the industry,” said Lawrence.