Moody's Investors Service says that the Australian Prudential Regulation Authority's (APRA) announcement that it will raise the amount of capital required for Australian residential mortgage exposures for Australian banks accredited to use the internal-ratings based approach to credit risk is credit positive for the country's leading banks.

This decision -- which was released by APRA on 20 July -- will increase the average risk weight on Australian residential mortgages from approximately 16% to 25%.

This development will impact Australia's major banks: Australia and New Zealand Banking Group Ltd (ANZ, Aa2 stable, a1); Commonwealth Bank of Australia (CBA, Aa2 stable, a1); National Australia Bank Limited (NAB, Aa2 stable, a1); Westpac Banking Corp (WBC, Aa2 stable, a1); and Macquarie Bank Limited (MBL, A2 stable, baa1).

"The change is credit positive for the risk profiles of these banks as it raises the amount of capital required to be held against their residential mortgages, which, on average, represent around 63% of the loans of Australian banks," says Frank Mirenzi, a Moody's Vice President and Senior Analyst.

"The larger capital requirement will provide a greater buffer against unexpected losses in the mortgage portfolios of these banks," says Mirenzi.

"Furthermore, APRA's announcement is the first step in strengthening the banks' capital positions and confirms Moody's long-held view that the major banks have entered a period of capital accumulation as a result of increasing capital intensity," says Mirenzi.

"The additional capital that will be required to be held against residential mortgages will better align the banks' capital positions with the growing tail risks arising from their residential mortgage exposures during a period of high investor demand and an associated rapid acceleration in house prices in Sydney and Melbourne," adds Mirenzi.

Moody's says that for the affected banks, finding the additional capital required to maintain their current capital ratios under the higher risk-weight standard will be manageable.

In this context, Moody's estimates that the additional capital required by the four major banks, in total, to maintain their current common equity tier 1 ratios would be approximately AUD10 billion, after the completion of capital initiatives already in progress.

In terms of other specifics, Moody's first notes that APRA's additional requirements will only become effective in July 2016, providing the banks with a one-year transition period.

Second, the banks are likely to substantially satisfy the new requirements from their strong levels of retained earnings and via dividend reinvestment plans. However, other market-based capital raisings.

Moody's expects further increases in capital requirements to be announced over the next 12 months, a result in turn of ongoing changes to the global capital adequacy framework for banks, as driven by the Basel Committee on Banking Supervision.

These expected changes are likely to result in further increases to capital intensity -- that is, the amount of capital required to achieve a given capital ratio -- and may require the banks to further strengthen their capital beyond the current measures.

During the week of 13 July, APRA also released a study of the international comparability of the capital ratios of Australia's major banks, and which determined that the country's major banks' ratios would, on average, be 300bps higher if they were reported using the capital ratio calculation approaches common in other major banking systems.

This is because APRA applies a number of conservative overlays to Australian bank capital ratio calculations.

The 20 July announcement also implies that results from international comparisons are likely to diverge even further from international comparisons as a result of the increased risk weights for residential mortgages.

Moody's views the increasing capital required by Australia's major banks to support their ratings against the backdrop of rising tail risks in the housing market.

At the same time, Moody's has already factored this assessment into their ratings, and more specifically, Moody's assessment is that their capital positions are consistent with a stand-alone, single-A rating profile.