The Australian Prudential Regulation Authority (APRA) has released a discussion paper for consultation with authorised deposit taking institutions (ADIs) on proposed revisions to the capital framework.
The revisions include proposed changes to the capital framework resulting from the finalisation of the Basel III reforms in December 2017, as well as other changes in relation to housing lending.
Under a proposed new simplified prudential framework APRA has indicated it will provide relief to small deposit takers from much of the complexity of Basel 3 compliance.
Standard mortgages
The key proposed changes to the capital framework include lower risk weights for low LVR mortgage loans, and higher risk weights for interest-only loans and loans for investment purposes, than apply under APRA’s current framework.
For large banks it recommends risk weightings of between 15 per cent to 22 per cent for owner-occupied principal and interest loans and risk weightings of between 20 to 27 per cent for other mortgages over residential property.
For small banks it recommends risk weightings of between 20 and 70 per cent for owner-occupied loans and 30 and 85 per cent for investment or interest only loans.
Non-standard mortgages
APRA proposes that all non-standard eligible mortgages would be subject to a risk weight of 100 per cent.
APRA proposes that APS 112 would require ADIs to designate as non-standard eligible mortgages those where the ADI:
• did not include an interest rate buffer of at least two percentage points and a minimum floor assessment interest rate of at least seven per cent in the serviceability methodology used to approve the loan;
• did not verify that a borrower is able to service the loan on an ongoing basis (i.e. positive net income surplus); and
• approved the loan outside the ADI’s loan serviceability policy.
APRA is also considering excluding certain other categories of loans considered higher risk from the definition of standard eligible mortgages, such as those with very high multiples of a borrower’s income.
APRA proposes to formalise through amendments to APS 112 its existing requirement that loans to self-managed superannuation funds secured by residential property should be treated as non-standard loans, reflecting the relative complexity of these loans and the fact that ADIs do not have recourse to other assets of the fund or to the beneficiary.
APRA also proposes that reverse mortgages, which are currently risk-weighted at 50 per cent (where LVR is less than 60 per cent) or 100 per cent (for LVRs over 60 per cent), would be treated as non-standard in light of the heightened operational, legal and reputational risks associated with these loans.
