Tuesday 11 April 2017 by Opinion

Australian banks – Fortune favours the (unquestionably) strong

In light of the most recent wave of macro prudential measures to support sound mortgage lending practices, APRA reminds banks and investors that it requires Australia’s four major banks to be ‘unquestionably strong’. But what does unquestionably strong mean? 


Speaking at the 2017 AFR Banking and Wealth Summit, APRA Chairman Wayne Byres has delivered a speech that, on initial reading, heightens the risk that the regulatory capital requirements for Australian banks will be increased further.

Unquestionably strong is something that the Australian banks readily achieved in the face of a struggling US and European banking sector post GFC. However, with the US now running strong and the European banks having rebuilt their capital bases and showing early signs of life, Australian banks’ strong relative positioning is being eroded.

APRA has strengthened capital requirements for Australian banks’ using internal models to determine their risk weights for residential mortgages – with the average increased to 25% –  which added in the order of AUD10bn to system capital requirements.

Now APRA has shifted its attention to ensuring capital is appropriately allocated, focusing on how risk weights are adjusted for housing related exposures. Considering Australia’s current economic environment, this has potential to create higher risk weights for interest only lending, as well as higher risk weights for non owner occupied property. Further, it is likely to impact many banks – for example, Westpac has almost 40% of its AUD380bn mortgage book out to non owner occupied.

As such, the level of interest in this week’s Financial Stability Review – due for release on 13 April – is increasing. We are expecting a section dedicated to household debt, property prices and excessive interest only lending.

Here is an extract from Wayne Byres’ speech:

“In moving ahead, we will be looking at many components of the capital adequacy framework, but given its position as the dominant asset on the balance sheet of the banking system, the adequacy of capital requirements for housing-related risks will be a critical part of that assessment.

Beyond the recently-announced tactical responses to current conditions in the housing market, making sure the system is on a sound footing for the longer term is even more important. Put simply, the capital adequacy framework needs to address the concentration in housing lending that has built up in the banking system over time: if we are going to put an increasing number of eggs into a single basket, we’d better make sure that basket is a (unquestionably) strong one.

After all, fortune favours the strong.”