APRA reviewing size of banks' home loan inventory as it fears too much in one basket
APRA is reviewing property lending practices of banks, and could ask them to raise more capital because of too much concentration into the housing sector, which is being seen as a risk now.
Wayne Byres, the chairman of the Australian Prudential Regulation Authority, said the watchdog needed to resolve the way the banks' allocate capital to home loans.
"If we are going to put an increasing number of eggs into a single basket, we'd better make sure that basket is an unquestionably strong one," Byres said at The Australian Financial Review's Banking & Wealth Summit.
The exposure of Australia's banks to home loans against total loans has grown to between 50 and 60 percent from between 10 and 30 percent in 1989, accelerating after the financial crisis as a shift to lower risk mortgage lending helped banks increase their capital ratios.
Byres said the "bigger issue" was how to address the build-up of housing debt in the system, potentially by requiring the banks to hold more capital against their home loan books, Fairfax Media reported.
His comments come within days of the APRA asking banks to cap interest-only loans at 30 percent of new residential mortgage loans. Interest-only lending represents nearly 40 percent of the stock of residential mortgage lending by banks, which APRA has called "quite high" by global standards.
CLSA analyst Brian Johnson said on the sidelines of the Summit that the big four had a $20 billion shortfall of capital at December 2016 and that for every additional 10 per cent increase in risk weights on investor lending, the capital required increased by a further $5.2 billion.
Australia's bank executives reacted by pleading for time to adjust to potential capital increases.
"There's probably some adjustment but it's not something we wouldn't be able to do over a reasonable amount of time," Westpac chief executive of consumer banking George Frazis told the Summit.
A move to force banks to increase the amount of capital they must hold against their mortgage books would hit their profit margins if they were unable to sufficiently reprice home loans.
Higher capital requirements could also slow mortgage lending or provide more of an incentive for banks to lend to other parts of the economy.
The examination of housing capital will be part of APRA's wider push to make Australia's banks "unquestionably strong" in terms of their capital levels, a target set for them by the 2014 Financial System Inquiry that required them to be among the top quartile of highly capitalised banks globally.
APRA will release its review of the sector's strength in the middle of the year, ahead of any global agreement on capital levels under the Basel regulatory framework.