Banking News

APRA Kick Starts Lending Growth through Competition

(14 December 2020 – Australia) The Australian Prudential Regulatory Authority (ARRA) is seeking to spark greater inter-bank competition, streamline SME lending and reduce mortgage risk weightings via a new framework of bank regulations.

Presented as part of a highly anticipated reform bundle delayed by COVID-19, APRA stated Australian banks were not expected to launch into capital markets to raise emergency funding. Capital adequacy may rise slightly under the rules due to risk weighted asset (RWA) adjustments for funding held against loans, potentially denting already supressed net interest margins (NIM) further.

Lower risk-weights should also boost small business lending in particular when the updates are applied from Q1 2023, with notable implications for the intensifying business lending race set in motion by CBA seeking to unseat NAB. CBA has recently ramped up its face-to-face branch staff and introduced wider scale same-day loan approvals across all its business banking products as it seeks to win the mantle as Australia #1 business bank away from NAB, while Westpac will likely suffer because it posses a greater proportion of loans with higher LVRs. Compared to its peers, investor loans were more dominant in its portfolio.

“To the extent that risk-weights for lending to SMEs go down, the changes are really good for NAB” commented Jeffries Head of Banks Equity Analysis Australia, Brian Johnson.

“Progressing these reforms in a timely manner will deliver a robust, competitive banking system that can continue to fulfil its critical role when our community is confronted by the challenges of the future” Mr Johnson added.

The amount of capital set aside for home loans will be increasingly dependent on the level of risk incorporating variables such as the purpose of the funds, the repayment profile and the loan-to-valuation (LVR) ratio. A simplified capital structure will also be applied to banks with less than A$20 billion in total assets, so their regulatory requirements will be alleviated without negatively impacting prudential buffers.

In 2017, APRA set benchmarks for bank capital adequacy that were consistent with the ‘unquestionably strong’ requirement from the 2014 Financial System Inquiry (FSI). The industry was given until the beginning of this year to meet the benchmark, and it did so before the onset of COVID-19.

“The proposed reforms will consolidate the capital position of the nation’s banks, and increase confidence in the system’s long-term resilience. The groundwork of previous years meant that, when COVID-19 hit, the Australian banking industry had sufficient capital depth to support customers, maintain the supply of credit, and help the economy on its path towards recovery” APRA Chairman Wayne Byres stated.

“These proposed changes will embed the ‘unquestionably strong’ capital position that has been achieved by the banking sector into a regulatory capital framework that is more flexible and responsive at times of crisis. Progressing these reforms in a timely manner will deliver a robust, competitive banking system that can continue to fulfil its critical role when our community is confronted by the challenges of the future” Mr Byres added.