APRA’s new mortgage risk weightings for the big four + 1

Following on from last week’s international capital comparison study, APRA has announced an increase in risk weightings for residential mortgages for the big four banks and Macquarie. APRA has determined that the average risk weighting across these banks must be at least 25% (compared to approximately 16% at present). This is seen as an interim measure until the Basel III rules are finalised and will come into effect on 1 July 2016. APRA estimates the changes will necessitate the banks increasing their minimum capital requirements by approximately 80bps in the next 12 months and Morgan Stanley suggests this could be around $12.5bn in fresh capital. CBA will be watched closely for comment as it will be the first bank to report its earnings in August. The move is seen not only as reducing the risk of a systemic crisis based on mortgage risk but as a win for the smaller regional banks in their ability to compete on mortgage products. The report can be found here.