The banking regulator APRA has introduced new mortgage rules, sending the share prices of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) down.
The regulator is directing the banks to be a little more cautious on riskier loans such as interest-only and investor loans. APRA is instructing banks to hold more capital to safeguard against these loans.
Most authorised deposit-taking institutions (ADI) are on their way to reaching the 'unquestionably strong' benchmark for capital ratios & targets and should not need to raise capital to meet these new measures.
APRA indicated that these new measures "aim to reinforce the safety and stability of the ADI sector by better aligning capital requirements with underlying risk, especially with regards to residential mortgage lending."
APRA Chairman Wayne Byres said "In setting out these latest proposals, APRA has sought to balance its primary objectives of implementing the Basel III reforms and 'unquestionably strong' capital ratios with a range of important secondary objectives. These objectives include targeting the structural concentration in residential mortgages in the Australian banking system, and ensuring an appropriate competitive outcome between different approaches to measuring capital adequacy."
According to reporting in the Australian Financial Review, this will mean that big banks will go back to Basel III rules but will apply a multiplier of 1.5x for low-risk loans and 2x for high-risk loans. With smaller banks, APRA is proposing lower-risk loans having a risk weight of 25% and higher risk loans attract a risk weight of 95%.
Foolish takeaway
Banks are being asked by the Reserve Bank of New Zealand and APRA to steadily hold more capital, making them less profitable, however it does mean they could be safer in a downturn.
All of the big banks are down between 0.5% to 1%, showing that this is a negative but not a huge one for the banks in the market's eyes.
