Watchdog wants bigger buffer for loans

A US T R A L I A ’ S b a n k i n g watchdog wants lenders to set aside more cash relative to the amount they lend out in riskier home loans, such as interestonly and investor mortgages.

It would be part of a package of reforms to rules about the amount of capital banks must hold as a buffer against loans that turn sour.

The Australian Prudential Regulation Authority yesterday flagged plans to take a more granular approach to how much capital banks must set aside.

It proposes to lift the required amount for loans that are deemed more risky. As it stands, all mortgages have the same capital requirements under the regulator’s standards.

APRA chair Wayne Byres said the regulator did not expect the changes to have any “material impact” on the availability of credit for borrowers.

It released a list of proposed changes in February last year, and has now published its response.

The proposals were borne out of the so-called Basel III reforms — guidelines that have been developed globally to help strengthen the international banking system — as well as the Financial System Inquiry carried out in Australia earlier this decade. That inquiry was led by former Commonwealth Bank chief David Murray, who now chairs AMP, and recommended capital ratios for domestic banks be “unquestionably strong”.

In a statement yesterday, APRA said it did not envisage banks would need to raise extra capital as a result of the proposed changes if they already met its other threshold on core capital under the “unquestionably strong” measure.

The plan is not expected to significantly change the gap in capital requirements between the big four banks and their smaller counterparts.

Mr Byres said APRA had sought to “balance its primary objectives of implementing the Basel III reforms and ‘unquestionably strong’ capital ratios with a range of important secondary objectives”.