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Category: Banking / Consumer Finance / Regulation

Banking rules give big four a $19b head start over rivals

Wednesday, 16 Nov 2016 12:26:55 | Stephen Letts

APRA estimates that the big four banks have an 11-basis-point cost advantage on mortgages. (AAP)

The big four banks enjoy a $19 billion advantage over their smaller rivals by still being able to self-calculate the riskiness of their home loans according to analysis from the Australian Prudential Regulation Authority.

Key points:

  • Big four hold $19b less capital against residential mortgages than they would have to under small bank rules
  • This gives big four an 11-basis-point cost advantage over smaller rivals on mortgages
  • APRA warns that big four may higher requirements from 2018

Despite a new regulatory framework requiring the big banks to hold larger top tier capital buffers, their ability to internally assess their asset risks is still a huge advantage in terms of the amount of "expensive" capital locked up and their ability to access cheaper funding.

While the CBA, NAB, Westpac and ANZ are now required to base their regulatory capital on a blanket of at least 25 per cent of mortgages being at risk, smaller lenders must base their risk weightings at 39 per cent.

"That difference in risk weights directly impacts the amount of capital held for a given portfolio of loans," APRA noted in a detailed answer to a question on notice from the House of Representatives Economics Committee hearing last month.

APRA's modelling assumed a 14 percentage point differential in risk weightings between the big Internal Ratings Based (IRB) lenders and the other smaller authorised deposit taking institutions (ADIs), as well a 9 per cent holding of top tier capital.

"(This) equates to a reduction in CET1 (Common Equity Tier 1) capital requirements of approximately $19 billion, in aggregate, for the four major banks' current Australian residential mortgage portfolios," APRA said in its answer to the committee.

The difference in capital requirements also impacts banks' profits and profitability, particularly in the cost of funding.

APRA said the big four enjoyed a pre-tax funding cost advantage of around 14 basis points, although this narrowed to 11 basis points due to a marginally higher capital requirement for being defined as domestic-systemically important banks.

Despite Financial System Inquiry, rules still favour big banks

The Customer Owned Banking Association - representing credit unions, building societies, mutual banks and friendly societies - said the APRA analysis showed regulatory rules still heavily favour the major banks.

"Common equity tier one regulatory capital is the most expensive form of funding and APRA allows the major banks to hold less of this form of funding against mortgages compared to their competitors," COBA chief executive Mark Degotardi said.

"What it means is that, in the mortgage market, the major banks have a head start built into the rules of the game."

The banks argue they have to spend hundreds of millions of dollars maintaining their internal rating certification to understand exactly what is happening in their loan portfolio and therefore warrant a discount on their risk weightings.

Second tier lenders, such as Bank of Queensland, Bendigo and Adelaide Bank and Suncorp are also working towards achieving the expensive IRB certification, which would lower their risk weightings.

The Financial System Inquiry, chaired by former CBA boss David Murray, drove reforms to push up risk weightings for major banks to at least 25 per cent after concerns were raised about the reliability of the banks continually lowering the risks they were calculating, and in turn reducing the amount of tier one capital they were required to hold.

The big four had previously held their risk weightings at between 14 and 20 per cent, with some mortgage portfolios having fewer than 4 per cent of loans deemed to be at risk.

Big banks set to face tighter rules

APRA chairman Wayne Byres told a Financial Services Institute function last week that raising risk weights from around 16 per cent to 25 per cent was an "interim step".

Mr Degotardi noted that, after the FSI's top recommendation to make regulatory capital for major banks "unquestionably strong", the second recommendation was about narrowing the gap in mortgage risk weights between the major banks and other banking institutions.

Bank profits under threat


Business reporter Stephen Letts looks at the possible new bank rules that may threaten profits.

"APRA has taken an interim step to narrow this gap but should go further," he said.

COBA is also looking for action on the third FSI recommendation, reducing the guarantee implicit in the banks' "to-big-to-fail" status, which the Reserve Bank calculated was worth almost another $4 billion back in 2013.

In last week's speech Mr Byres said 2017 would be "a year of consultation" over the next steps in the FSI and implementing new global regulatory requirements.

"Even if that is the case, they would not take effect until at least a year after that," Mr Byres said.

"Capital accumulation remains the appropriate course for most ADIs, but with sensible capital planning the actual implementation of any changes should be able to be managed in an orderly fashion."

Mr Degotardi said it is disappointing there is no timetable to push ahead with the FSI reforms.

"COBA would like to see APRA acting with greater urgency in implementing reforms that add to banking system resilience and reduce the advantages major banks have over their smaller competitors," he said.

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