Australia’s major home lenders have today faced a rule change which will require them to increase the amount of capital they are required to hold to back mortgages.
The rule change has been announced by the Australian Prudential Regulation Authority (APRA) announced today that for Authorised Deposit-taking Institutions (ADIs) such as banks and building societies, the average risk weight on Australian residential mortgage exposures would increase from approximately 16 per cent to at least 25 per cent.
The APRA announcement said the increase in the internal ratings-based (IRB) mortgage risk weights addressed a recommendation of the Financial System Inquiry (FSI).
However, it said increase was also consistent with the direction of work being undertaken by the Basel Committee on Banking Supervision (Basel Committee) on changes to the global capital adequacy framework for banks.
The APRA announcement said the increased IRB risk weights would apply to all Australian residential mortgages, other than lending to small businesses secured by residential mortgage.
However, in making the announcement, APRA flagged a 12 month transition saying the new arrangements would take effect from 1 July, next year.
In order to provide these ADIs sufficient time to prepare for the change, the higher risk weights will come into effect from 1 July 2016.
Further it said the increase in IRB mortgage risk weights announced today was an interim measure because it was not possible to settle on the final calibration between the IRB and standardised mortgage risk weights until changes arising from the Basel Committee’s broader review of the framework were complete.
