APRA’s bank equity increase could see interest rates rise too

Thursday 20 July 2017

Article by Kelly Emmerton

APRA has announced that the big 4 will need to increase their capital ratios to at least 10.5%, in a bid to make capital requirements “unquestionably strong.” But while the move may safeguard banks, borrowers may end up getting higher interest rates out of the deal.

APRA’s bank equity increase could see interest rates rise too

The new "capital adequacy" requirement means the big four banks and Macquarie were served with a 1.5% increase to their minimum safety reserves, while smaller banks needed to increase by 0.50%.

For the major banks, this shouldn’t pose too much of a problem - the big four already generally hold more than the current minimum. According to APRA, this means the big banks will need to increase their capital ratios by an average of 100 basis points to meet the new minimum.

In fact, ANZ has announced it already meets the standard, with a CET1 capital ratio of 10.1% at the end of March, which on a proforma basis - meaning taking into account previously announced asset sales - is equivalent to a CET1 ratio of 10.5%.

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APRA Chairman Wayne Byres said that, “APRA’s objective in establishing unquestionably strong capital requirements is to establish a banking system that can readily withstand periods of adversity without jeopardising its core function of financial intermediation for the Australian community.”

In order to boost their capital reserves, banks might choose to sell new shares or retain some of their profits. Or, they may decide to increase interest rates for home loan borrowers, according to Mozo Data Manager Peter Marshall.

“While there’s no material reason why this change should mean higher interest rates for borrowers, it does add to a raft of reasons the banks can point to when justifying further rate rises,” he said.

“It keeps the pressure on banks to increase rates, rather than start decreasing them.”

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APRA has advised that reaching the new minimum should be achieved in “a timely manner” and by January 1, 2020 at the latest, which Marshall said should give the banks plenty of time to manage the increase without resorting to major, knee-jerk changes.

“It isn’t like the banks are suddenly scrambling for funding, so any changes for borrowers should, by all rights, come gradually,” he said.

“The important thing for borrowers is to be prepared, since rate rises are probably coming in the future, for one reason or another. That might mean reviewing your budget, ramping up your savings plan or in some cases, even refinancing your home loan to a better value deal.”

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