APRA takes step to make Australian banks safer and 'unquestionably strong'

The Australian Prudential Regulation Authority (APRA) has taken further steps to ensure all banks are safe. The big four is expected to face increased capital requirements so they can be “unquestionably strong.”

The bank regulator puts focus to its new capital adequacy targets. The APRA will reportedly require a 150-basis-point climb in the minimum safety reserves to be held by the big four banks and Macquarie. Meanwhile, other banks will bear a smaller 50-basis-point increase in the tier one capital in reserve to offset possible losses.

Since the nation’s big four generally holds considerably more than the current minimum capital requirement, they may need to up their tier one ratios by an average of around 100 basis points over December 2016 levels. ANZ, for instance, has told the ASX that it already meets the new standard of 10.5 percent.

Michelle Jablko, ANZ chief financial officer, said the bank was well-placed to obtain the strengthened capital standards. "Together with the benefits from announced but yet to be completed asset sales, ANZ is well placed to achieve the strengthened capital standards, and to do so well ahead of the schedule outlined by APRA," Jablko noted, according to ABC.

The bank's share price in early trade has rebounded 2.7 percent to $29.05 in very early trade. Westpac, on the other hand, said its tier one capital ratio was at 10 percent by the end of March.

Higher mortgage rates or lower deposit rates

As for the move’s impact to customers, it seems likely that any effect will be modest. Velocity Trade banking analyst Brett Le Mesurier said it could be seen in slightly higher mortgage rates or a drop in deposit rates.

"They [APRA] have said that for a hundred-basis-point increase in the capital ratio, they would expect the margins to increase by approximately 10 basis points to pay for the reduction in the ROE, or the return on equity," he told ABC's The World Today. As for the banks and investors, the APRA announcement gives certainty about where the goalposts sit for their safety reserves.

According to APRA chairman Wayne Byres, the latest announcement from the regulator is the “culmination” of almost a decade's financial reform work to build capital strength in the Australian financial system. Banks have until January 1, 2020 to execute increased requirements, which involve retaining some profits or selling new shares.

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