150bp increase for major banks will lead to higher interest rates, claims expert, but Scott Morrison disagrees
150bp increase for major banks will lead to higher interest rates, claims expert, but Scott Morrison disagrees
APRA has raised capital requirements for Australia’s major banks plus Macquarie, prompting fears of further rate rises for borrowers.
By January 2020, the majors and Macquarie will need to have a CET1 capital ratio of at least 10.5%, up 150bp on its previous level. Other banks have had their capital ratios raised by around 50bp. Since the Financial System Inquiry in 2014 capital ratios have increased by almost 250bp and been used by some banks to justify rate increases.
“Today’s announcement is the culmination of nearly a decade’s financial reform work aimed at building capital strength in the financial system following the global financial crisis,” said APRA chairman Wayne Byres, “Australia has a robust and profitable banking industry and APRA believes this latest capital strengthening can be achieved in an orderly way.”
Potential for 20-25bp rate rise
According to Martin North, principal of Digital Finance Analytics, increased capital requirements will make loans more expensive.
Writing on DFA’s blog, North estimated that “Banks will probably need another $10-15 billion of capital...If applied to mortgages and small business borrowers only, we estimate this to be a 20-25 basis point hike (varies by bank, and business mix).”
However Treasurer Scott Morrison said pricing should not be affected: "I don't think this, like the first time [APRA moved on risk weightings] a couple of years ago, provides any excuse for profiteering, I don't think it provides any excuse for those sorts of changes [in interest rates].”
Banks do not need to reach the new capital ratios until 2020 and so any rate hikes could be delayed. Furthermore, ANZ and CBA did not mention rate increases in their initial response to APRA, although ANZ did suggest it would be able to implement changes “well ahead of the schedule outlined by APRA”, according to ANZ CFO Michelle Jablko.
Opportunity for the non-majors
Morrison has suggested that increased competition could offer consumers protection from rate increases, as capital ratios haven’t increased as much for non-major banks.
The Customer Owned Banking Association has welcomed the increase, noting that “the Government’s response to the Financial System Inquiry said the resilience measures will reduce the advantages the larger banks have over their smaller counterparts, increasing competition and leading to better outcomes for consumers.”
Nevertheless, the non-majors will need to increase capital ratios and deal with the costs of doing so, with Australia’s borrowers potentially suffering more pain in APRA’s quest to be “unquestionably strong”.
APRA has raised capital requirements for Australia’s major banks plus Macquarie, prompting fears of further rate rises for borrowers.
By January 2020, the majors and Macquarie will need to have a CET1 capital ratio of at least 10.5%, up 150bp on its previous level. Other banks have had their capital ratios raised by around 50bp. Since the Financial System Inquiry in 2014 capital ratios have increased by almost 250bp and been used by some banks to justify rate increases.
“Today’s announcement is the culmination of nearly a decade’s financial reform work aimed at building capital strength in the financial system following the global financial crisis,” said APRA chairman Wayne Byres, “Australia has a robust and profitable banking industry and APRA believes this latest capital strengthening can be achieved in an orderly way.”
Potential for 20-25bp rate rise
According to Martin North, principal of Digital Finance Analytics, increased capital requirements will make loans more expensive.
Writing on DFA’s blog, North estimated that “Banks will probably need another $10-15 billion of capital...If applied to mortgages and small business borrowers only, we estimate this to be a 20-25 basis point hike (varies by bank, and business mix).”
However Treasurer Scott Morrison said pricing should not be affected: "I don't think this, like the first time [APRA moved on risk weightings] a couple of years ago, provides any excuse for profiteering, I don't think it provides any excuse for those sorts of changes [in interest rates].”
Banks do not need to reach the new capital ratios until 2020 and so any rate hikes could be delayed. Furthermore, ANZ and CBA did not mention rate increases in their initial response to APRA, although ANZ did suggest it would be able to implement changes “well ahead of the schedule outlined by APRA”, according to ANZ CFO Michelle Jablko.
Opportunity for the non-majors
Morrison has suggested that increased competition could offer consumers protection from rate increases, as capital ratios haven’t increased as much for non-major banks.
The Customer Owned Banking Association has welcomed the increase, noting that “the Government’s response to the Financial System Inquiry said the resilience measures will reduce the advantages the larger banks have over their smaller counterparts, increasing competition and leading to better outcomes for consumers.”
Nevertheless, the non-majors will need to increase capital ratios and deal with the costs of doing so, with Australia’s borrowers potentially suffering more pain in APRA’s quest to be “unquestionably strong”.
