The Australian Prudential Regulation Authority (APRA) has announced an increase in the amount of capital required for Australian residential mortgage exposures by the 4 major banks (Australia and New Zealand Banking Group, Commonwealth Bank of Australia, Macquarie Bank, National Australia Bank and Westpac Banking Corporation).

The change will mean that, for the major banks accredited to use the internal ratings-based (IRB) approach to credit risk, the average risk weight on Australian residential mortgage exposures will increase from approximately 16 per cent to at least 25 per cent.

The increase in IRB mortgage risk weights addresses a recommendation of the Financial System Inquiry (FSI) that APRA ‘raise the average 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 higher risk weights will apply to all Australian residential mortgages, other than lending to small businesses secured by residential mortgage, from 1 July 2016.

No changes have been made to the capital requirements for ADIs using the standardised approach (non-IRB ADIs).