APRA demands higher buffer on big four banks

Australia’s big four banks are renowned for their level of safety and high dividend yields. In part, this has all been possible because of the tough regulatory environment which forces the banks to conform to strict lending criteria.

The Australian Prudential Regulation Authority (APRA) enforces the tough rules. In its most recent attempts to ensure safer lending practices, it will demand the big four banks hold an additional 1% for the common equity tier one ratio by 2016.

The rules apply to the Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), ANZ Banking Group (ASX: ANZ) and National Australia Bank (ASX: NAB). Collectively, these banks dominate the local market yet they are not “too big to fail” as much of the population believe. The reason they are required to hold extra capital in case of a financial downturn is due to their size with respect to the local economy. They are “domestic systemically-important banks.”

“The designation is intended to ensure that banks perceived to be ‘too big to fail’ are subject to more intense supervisory oversight and have greater capacity to absorb losses, to increase their resilience to failure,” APRA said in a statement.

According to The Australian Financial Review: “Recent Nomura research estimated the major banks would have a shortfall ranging from $483 million for Westpac to $2.1 billion for the Commonwealth Bank.”

All of Australia’s big banks have capital buffers ahead of the current requirements. NAB, who has the lowest common equity tier one ratio of the banks, made an announcement this morning stating it has a strong capital position and expects to be able to meet the revised capital requirements through organic generation and if required, through its dividend reinvestment plan.

The banks are currently experiencing slow credit growth, which means they can afford to set aside less money to lending. Of the big banks, Westpac has the highest level of tier one capital, followed by the Commonwealth Bank and ANZ.

Foolish takeaway

Many analysts expected APRA to raise the capital requirements, however as a result of the changes in the next few years, big bank dividends and certainly ‘special dividends’ are unlikely to grow as fast as many investors have expected. However, for long-term shareholders, a small drop in the level of forecast dividend increases shouldn’t detract from the reason they hold bank shares in the first place – safety.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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