APRA puts banks on notice over housing risks

This morning, APRA announced that the big four and Macquarie must increase the average risk weight for Australian residential mortgage exposures from approximately 16 per cent to "at least" 25 per cent.

"Broadly speaking, an increase in the IRB risk weight for Australian residential mortgage exposures from the current average of around 16 per cent to 25 per cent is the equivalent of increasing minimum capital requirements for the major banks by approximately 80 basis points," APRA said.

"The impact will vary somewhat from ADI to ADI, depending on the size and nature of their lending portfolio."

The change will come into effect on 1 July 2016.

In response to the announcement, CBA said that from that date, the risk weightings of CBA's Australian residential mortgages would increase to an average risk weight of at least 25 per cent.

"For CBA, we expect that this will have the effect of increasing the amount of Common Equity Tier 1 (CET1) required for Australian residential mortgages by approximately 95 basis points from 1 July 2016. To the extent that there is any increase of actual capital levels as a result of this change, this will further improve our position relative to international peers," the bank said in a statement.

CBA chief financial officer David Craig said, "Financial strength, including a strong capital position, is a pillar of CBA's strategy. In expectation of APRA's recent announcements, CBA has been working on a number of options for managing our capital over the coming year. We will provide more commentary on these announcements when we present our annual results on 12 August 2015."

Last week, APRA told the federal Inquiry into Home Ownership that while Australia's banking and housing system has historically been solid, risks have emerged and things can change quickly.

Australia's share of non-performing housing loans has been extremely low by international standards since the Reserve Bank of Australia began collecting data nearly 20 years ago, according to APRA's submission.

"However, in APRA's view, the current economic environment for housing lenders is characterised by heightened levels of risk, reflecting the combination of historically low interest rates, high household debt, subdued income growth, unemployment that has drifted higher, significant house price growth and strong competitive pressures," the submission said.

"Moreover, recent experience from around the world shows that it is unwise to be complacent about imbalances that can build in the housing sector."

The larger banks have been given specific feedback on areas that need strengthened policies or practices, according to APRA.

The regulator said it will monitor the impact of its current initiatives and would consider taking further measures to ensure that emerging risks are contained.

Such measures could include tightening lending standards, setting limits on particular types of higher-risk lending and forcing more aggressive banks to hold more capital, APRA said.