Junior lenders are calling for Australia’s major banks to be hit with heavier mortgage risk weights, arguing that the Australian Prudential Regulation Authority’s interim changes don’t go far enough.
Small- and mid-tier banks are increasingly vocal about their desire for regulatory changes as APRA prepares to unveil new rules to meet global standards set by the Basel Committee and the final report of the Murray Financial System Inquiry.
Melos Sulicich, chief executive officer and managing director of MyState, recently argued that the major banks’ minimum average mortgage risk weights must be raised to at least the upper end of the Murray Inquiry’s recommendation of 30% to “address competitive inequality”.
Sulicich believes that the regulatory capital requirement advantage was compounded by the Big Four’s lower funding costs derived from the implied government guarantee that they would be bailed out when stressed. “At present, small banks hold 56 per cent more capital, which is a huge disparity,” he noted.
“The public [is] crying out for the competition provided by small banks, but we are obliged to issue fewer mortgages using the same capital. The really unfair aspect is that the risk of the mortgages issued is the same.”
Mike Hirst, managing director of Bendigo and Adelaide Bank, said that customer choice had been harmed by several regulatory “free kicks” given to the major lenders.
The Big Four—Commonwealth Bank, Westpac, ANZ, and National Australia Bank, plus Macquarie—require less capital to write loans after investing in advanced “internal rating-based” modelling systems. These systems were accredited by APRA before the global financial crisis.
In contrast, other lenders operate under a standardised system in which average mortgage risk weights are 39%—far higher than the approximately 16% for the major lenders. The Murray Inquiry recommends that the major lenders’ mortgage books be risk-weighted at an average of 25% to 30% to boost competition.
APRA recently lifted the risk weights to 25%, but stressed that it was a temporary measure. This could be increased once the Basel Committee finalises its latest rules, which will be unveiled next January.
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