The regulator is proposing an aggregate-level risk-weight floor based on internal ratings-based approach.
Despite the proposal of less conservative schemes than Basel, Australian banks should have no problem meeting the latest proposed revision to the regulatory capital framework as they need only adjust for the slight possibility of a modest adjustment in loan portfolios and loan-to-value ratios, according to Fitch Ratings.
"The proposals are unlikely to affect banks' credit profiles significantly in the short term, and we expect banks to make only modest adjustments to the mix of their loan portfolios as a result of new risk weights," Jack Do, director of financial institutions - banks, said in a report.
The Australian financial regulator earlier proposed an aggregate-level risk-weight floor for banks that use the internal ratings-based approach, which is less conservative than Basel that applies the floor at asset-class level, limiting the capital benefit from diversification effects. It also backpedalled on its approach to the classification of non-standard mortgages, choosing a narrower definition that will lead to lower risk weights under the standardised approach compared with Basel.
However, Fitch Ratings notes that despite the less conservative approach, APRA's proposals are weaker than Basel in some aspects including their treatment of several types of higher-risk exposure. APRA proposes a 100% risk weighting for non-standard residential mortgages, compared with 150% under Basel and proposes a 90% risk weighting (if lender's mortgage insurance is in place) and 95% (without lender's mortgage insurance) for standard investment, interest-only or SME mortgages secured by residential property with loan-to-value ratios greater than 100%. The corresponding Basel risk weighting is 105%.
"APRA's more lenient stance on some of these standards, and its easing of various mortgage underwriting requirements over the past 12 months, bolster banks' lending capacity as economic and credit growth slow, and mitigate falling house prices," added Do. "Nonetheless, most of APRA's proposals are in line with or more conservative than Basel standards. They include higher risk weights for most of the standard residential mortgage categories not mentioned above, and for retail lending other than credit cards."
The revised capital framework to take full effect on 1 January 2022, with no phase-in period, after a consultation period that ends on 6 September 2019.
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