APRA orders banks to increase their financial reserves

Australia’s banking regulator has spelled out to lenders how much more capital they need to hold, as it continues its efforts to strengthen the financial system.

APRA announced today that ANZ, Commonwealth Bank, NAB, Westpac and Macquarie Bank will have to increase their minimum capital requirements by about 150 basis points.

Other lenders will be subject to an increase of about 50 basis points.

Lenders will be expected to meet these new benchmarks by 1 January 2020.

The 2014 Financial System Inquiry recommended that the banking sector  establish “unquestionably strong” capital ratios. APRA has now defined what that term means.

Big banks on track to meet new rules

The reason APRA has singled out the big four banks and Macquarie is because they are allowed to use different risk models to other lenders.

These five banks have already been operating with a higher capital surplus above regulatory minimums, having anticipated today’s announcement, according to APRA.

“APRA therefore expects that some of the increase in minimum requirements might be met through the surplus these [banks] hold in excess of minimum regulatory requirements,” it said.

No need to “significantly” lift rates

Treasurer Scott Morrison made a similar point, saying that Australia’s lenders are “well placed” to meet the new benchmarks by schedule.

“Today’s announcement should not significantly impact loan pricing or consumers’ ability to access finance,” he said.

“APRA envisages that the unquestionably strong capital ratios can be met by 2020 and that the major banks should be able to meet the additional capital requirements from retained earnings, without significantly affecting business growth plans, dividends policies or undertaking equity capital raisings.”

Government supports new rules

The Treasurer also said that the government supports APRA’s new rules on capital ratios, because they will strengthen Australia’s financial resilience.

“The increased requirements will put Australia’s capital framework at the forefront of international best practice and help ensure the financial system can endure future external shocks,” he said.

“It is imperative that our banking system is unquestionably strong as it underpins some of the biggest decisions we make, including buying a home or starting a business.

“Capital is a bank’s first line of defence against unexpected losses and the key safeguard of the banking sector’s stability.”

Compare home loans in Australia