Rising Tide Blog

Will it or won’t it?  The debate over whether or not Sydney and Melbourne are currently in a property bubble that will inevitably burst has dominated the front page of every newspaper’s real estate section for the past twelve months.

The Australian Prudential Regulation Authority (APRA) clearly isn’t prepared to take any chances. They recently announced that the big four banks will need to increase the amount of capital they have in reserve to 25% (up from 16%) in order to offset their risk in the event of a housing market crash.

This move could have frustrating consequences for consumers in the short-term because it means that the big banks won’t be vying as hard for mortgage business and special discounts and incentives won’t be so readily on offer.  It also means that the banks could increase rates for existing borrowers and shareholders in order to fund the extra capital they are required to raise.

Most importantly, the new regulations should be a warning sign to property owners or prospective property owners.  APRA are the experts.  They know what they’re doing so if they’re being cautious about the state of the market, then consumers should surely take this as a cue to be cautious as well.

This sort of regulation really is something we should be grateful for as it ultimately protects our economic strength on an international scale.  Remember how Australia managed to avoid the brunt of the global financial crisis?  A big reason for that is the fact that we have strict rules and regulations in place for lenders in comparison to other countries.  This latest move by APRA has been devised to minimise the exposure that banks have to economic shocks.

These new regulations apply to Commonwealth, National Australia Bank, ANZ and Westpac only.  Smaller lenders already had to hold a minimum of 35% capital to offset their mortgage lending so to put this new measure in perspective, 25% for the large banks is still significantly lower than the pre-existing regulations for smaller operators.

In Australia, around 67.7% of residential loans are held by the big banks.  It’s APRA’s job to ensure that our banks are resilient on a global scale and considering that the big banks are holding less capital now than they were pre-GFC, it is reasonable for APRA to be taking steps to lower this risk.

APRA could still lift the 25 per cent floor further, depending on the outcome of the Bassel Committee on financial regulations later this year.