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SYDNEY, Nov. 29 (Reuters) – Australia’s banking regulator on Monday released a final set of rules asking banks to hold more capital against investor loans and interest-only home loans, but less for business loans, this which should affect the pricing of loans.
After four years of consultation, the new set of standards aligned with Basel III changes the models used by banks to determine the amount of capital they must hold, and will come into effect in January 2023.
This will not force the banks to raise more capital.
Instead, the current requirement for Australia’s four largest lenders to maintain core capital above the minimum benchmark of 10.5% to be considered ‘unmistakably strong’ will be replaced by minimum ratios specific to banks.
“Although Australia’s banking sector is already heavily capitalized by international standards, the new capital framework will help ensure it remains so,” said Wayne Byres, Chairman of the Australian Prudential Regulation Authority (APRA).
The new framework will also improve the comparability of Australian banks with their global counterparts, Byres added.
Under the new rules, investor mortgages, interest-only mortgages and those with a loan-to-valuation ratio above 80% will be considered riskier and given a higher risk weight, the said. regulator.
Homeowner loans borrowing on principal and interest will be considered less risky and require less capital.
Small banks will also be able to allocate less capital to unsecured loans to small and medium-sized businesses, according to the newspaper.
“The capital framework was designed to allocate higher capital requirements for higher risk loans and lower requirements for lower risk,” the regulator said in a briefing paper released Monday.
“This both encourages banks to lend prudently and requires more capital to be held for riskier loans which have a higher probability and impact of loss.”
Analysts expect the new rules to shape mortgage pricing, as banks will compete for loans requiring the least capital.
Banks dominating the Australian market – Commonwealth Bank of Australia (CBA.AX), Westpac Banking Corp (WBC.AX), Australia and New Zealand Banking Group (ANZ.AX) and National Australia Bank (NAB.AX) – are also expected to pass on the higher cost of holding more capital for riskier mortgages, analysts said.
Under the new framework, banks will hold more of the regulatory capital in the form of buffers or cash that can absorb losses in times of stress, the regulator said.
Editing by Jacqueline Wong
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