The winds of change

The regionals recommended a ‘levelling of the playing field’ in terms of capital requirements.

Fast forward 12 months to July this year and the non-majors’ wishes were granted when APRA moved to increase capital restrictions on five of Australia’s biggest banks. The regulator highlighted that a healthy banking sector is crucial for a healthy economy.

Banks accredited to use the internal ratings-based (IRB) approach to credit risk (ie. the big four banks and Macquarie) must now increase the average risk weight on their Australian residential mortgage exposures.
The increase will lift from approximately 16 per cent to “at least” 25 per cent, which equates to around 80 basis points, and will take effect from 1 July 2016.

Bendigo and Adelaide Bank, BOQ, ME and Suncorp Bank all applauded APRA’s decision.

“Standardised banks are already required to hold more capital (with average risk weights of 39 per cent) on their residential mortgage exposures. This remains unchanged,” a statement from the banks said.

“The regional banks, which have advocated for a set of financial system rules and regulations that would strengthen confidence in Australia’s financial system, believe this change is an integral step towards creating a more even playing field for all banks and will increase competitive neutrality in the market.”

Government agrees to lift competition

On 20 October this year, the government published its response to the FSI, in which it agreed with the recommendations concerning capital levels and narrowing mortgage risk weight differences between the non-majors and the IRB banks.

“The government agrees that the capital ratios of Australian banks should be unquestionably strong,” it said.

“This will ensure the financial system remains resilient during difficult times and will maintain investor confidence.

“We support and endorse APRA as Australia’s prudential regulator to implement this recommendation, and will continue to closely monitor the resilience of our banks.”

In addition, the government agreed that the gap between average mortgage risk weights should be narrowed, highlighting that this will “aid competition in the banking sector”.

“We support and endorse APRA as Australia’s prudential regulator and its initial actions announced on 20 July 2015 to raise the average IRB mortgage risk weights to at least 25 per cent from 1 July 2016 to implement this recommendation,” it said.

The government noted that the major banks have already undertaken capital raising to increase their capital levels.

So what does all this mean for the non-majors going forward?

For a start, it increases the competitive neutrality in the Australian mortgage market from a bank capital perspective.

The regulatory requirements imposed on the major banks have effectively created an opportunity for the non-majors to shine. As the majors prepare to meet APRA’s 1 July 2016 deadline, they have been busy raising capital and increasing the cost of mortgages with higher rates. In response, a handful of non-majors have started reducing their rates.

Recent rate discounting by the non-majors signal that they are using these changes to set themselves apart from the majors, proving that they can deliver value to customers through competitive offerings.

In an October research note, Morningstar said that in the medium term, the non-majors will benefit from tougher regulatory requirements forced on the majors. The report also noted that Australia’s smaller banks have the upper hand when it comes to customer satisfaction.

As we enter 2016, it will be interesting to see how the non-majors respond to the changing lending landscape.

The ultimate goal will be delivering competitive offerings to brokers – who are fast becoming a port in a storm of market complexity. And the preferred channel for new borrowers.