APRA revises proposed changes

After receiving 18 industry submissions, APRA has released its response to the first round of consultation on the proposed changes to the capital framework for ADIs.

Last November, APRA outlined its strategy for ensuring that banks have adequate financial resources in the event of failure.

After considering both industry feedback and the findings of a quantitative impact study, APRA could revise some of its initial proposals, including:

• For residential mortgages, narrowing the capital difference that applies to lower risk owner-occupied, P&I mortgages and all other mortgages
• 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
• Lower risk weights for credit cards and personal loans secured by vehicles

APRA chair Wayne Byres has clarified that the regulator does not expect its proposed revisions to have “any material impact on the availability of credit for borrowers.”

He further explained, “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.

According to APRA, its consultation on the revisions to the ADI capital framework is a “multi-year project.” The regulator expects one further round of consultation prior to finalisation, with the aim of the revisions going into effect from 1 January 2022.

“With regard to the impact of risk weights on competition in the mortgage market, APRA has previously made changes that mean any differential in overall capital requirements is already fairly minimal. APRA does not intend that the changes in this package of proposals should materially change that calibration, and will use the consultation process and quantitative impact study to ensure that is achieved," Byres said. 

“It is also important to note that the proposals announced today will not require ADIs to hold any capital additional beyond the targets already announced in relation to the unquestionably strong benchmarks, nor do we expect to see any material impact on the availability of credit for borrowers."