21 Jul 2015

Banks need to set aside more capital - APRA

9:37 am on 21 July 2015

The banking regulator in Australia wants the country's major lenders to set aside more capital against potential losses on home loans, and help bolster the financial system.

The Australian Prudential Regulation Authority, or APRA, said the major banks - ANZ, Commonwealth, National Australia Bank and Westpac, would require an average mortgage risk weight of 25 percent on residential mortgages, compared with the current average of around 16 percent.

The regulator was forcing banks to prop up their capital after a Government review recommended they should rank among the top 25 percent of lenders globally.

Banking analyst Martin North said the major banks currently hold less capital against their mortgages than they did before the financial crisis, and that needs to change.

"The more capital banks hold, the more resilient the banks are, the less likely it is that one of them will get difficulty and want to be bailed out," he said.

The banks warned customers and investors may need to bear the cost of meeting the new rules.

"Mortgages probably will cost a little bit more, there will be less discounts around as these begin to work through the system," Mr North added.

Last week, KPMG New Zealand's head of financial services John Kensington, warned that if Australia's major banks were forced to raise more capital, then their units in New Zealand would be affected.

The new rules, which also apply to Macquarie Bank, come into force at the beginning of July next year.