Australia’s biggest banks will need to hold billions of dollars in extra capital against their home loans after the banking regulator moved to strengthen the financial system.

The Australian Prudential Regulation Authority (Apra) says it will increase the average risk weighting for home loans from about 16% to at least 25% from 1 July 2016.

In a statement, Apra said the move would require the banks to lift their capital reserves by about 80 basis points on average.

That would go some way towards the extra 200 basis points of capital Apra wants to banks to hold so their reserves rank among the top quartile of global banks, which was a recommendation of the government’s financial system inquiry.



The move will apply to the big four banks – ANZ, the Commonwealth, National Australia Bank and Westpac – as well as Macquarie Group. Until now, they have been able to set their own risk weighting for mortgages.

The exposure of Australia’s banks to the property market has been a mounting concern for the regulators.

The Reserve Bank of Australia has cut interest rates twice in 2015 but has promised to join forces with other regulators “to assess and contain risks that may arise from the housing market”.

Smaller banks already have a risk weighting of 35% and have argued the status quo amounted to a competitive advantage for the major lenders.



ANZ said its current risk weight for mortgage lending was about 15% and it would need to add another $2.3bn to its mortgage lending book to meet the Apra requirement.

Westpac said that if the Apra move was imposed today, its common equity tier one ratio would fall to about 8.5%, and it would need to allocate another $3bn to lift it towards the top end of its preferred 8.75% to 9.25% range.

National Australia said it was well placed to process the lift in risk weights after raising $5.5bn from investors in May.

The Commonwealth said it had been working on options to lift its capital levels, and Macquarie Group said it would fund any extra requirements through retained earnings and its existing capital surplus.



