Investors could be facing higher interest rates across the board after the government made some significant announcements regarding the financial system earlier this week.
Banks justifying rate rises by blaming increased regulatory requirements may become increasingly common practice following the federal government’s response to the Financial System Inquiry.
In its response, released Tuesday morning, the government agreed to all but one of the inquiry’s 44 recommendations.
The inquiry’s final report was released in December last year.
The government’s responses indicate its strong support for the prudential regulator, APRA, tightening capital requirements for Australian lenders – requirements that have been cited by some lenders as part of the reason behind recent rate rises.
Last week Westpac cited the requirements when announcing increases to variable home loan rates for investors and owner-occupiers.
George Frazis, chief executive, consumer bank at Westpac, said that following regulatory changes, the amount of capital that needs to be held against mortgages will increase by more than 50 per cent.
“To meet these new rules, including the significant amount of capital that we must now hold against residential mortgages, Westpac has announced today it is raising an additional $3.5 billion in CET1 capital,” Mr Frazis said.
“As we have always said publicly, while Westpac is well placed to meet these changes, a significant increase in capital ultimately increases the cost of providing home loans to customers,” he said.
“This is a difficult decision and one that is not taken lightly. We acknowledge that it does impact customers, even in an environment where interest rates remain near historic lows. We have sought to carefully balance the needs of our borrowers, depositors and our shareholders, as well as the competitive market we operate in.”
The government also agreed to recommendation two, the driving force behind APRA’s recent actions to narrow the gap between internal ratings-based (IRB) risk weight-models and standardised risk weights.
“Raise the average internal ratings-based [IRB] mortgage risk weight to narrow the difference between average mortgage risk weights for ADIs using IRB risk-weight models and those using standardised risk weights,” the recommendation read.
In response, the government again reiterated its support for APRA’s initial actions, stating that the narrowing of the risk-weight gap will aid competition in the banking sector.
“We support and endorse APRA as Australia’s prudential regulator and its initial actions announced on 20 July 2015 to raise the average IRB mortgage risk weights to at least 25 per cent from 1 July 2016 to implement this recommendation. The major banks have subsequently undertaken capital raisings to increase their capital levels,” the response read.
Those initial changes in July were targeted at ANZ, Commonwealth Bank, NAB, Westpac and Macquarie Bank – the five Australian lenders that use the IRB approach to credit risk.
The government indicated that it would be keeping a close eye on lenders as they respond to these changing requirements.
“We will take an active and ongoing role in monitoring developments as a result of these changes,” it stated.
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