Major banks will come under pressure not to pass on the full benefit of future official rate cuts after regulators announced plans to increase capital requirements on lending to home borrowers.
The new capital rules, predicted in The New Daily in February, will take effect in July next year.
At the moment, the four major banks – ANZ, Commonwealth, Westpac and NAB – are required to put aside about $1.70 in capital for every $100 they lend to a home borrower.
For an average home loan of $300,000, that means the major banks currently put aside around $5100 to cover against the risk of borrower defaults.
However, under changes to be introduced by the Australian Prudential Regulation Authority on Monday, the major banks will be forced to put aside $7500 on loans of the same value.
That means the cost of lending to average borrowers is about to go up by more $2000.
How will the major banks respond?
The new lending rules for home mortgages will erode the profitability of home lending for the major banks.
While each of the banks will issue more shares to raise cash to cover the new costs, borrowers could also be hit with a new fee or miss out on the full benefit of future official rate cuts.
ANZ chief executive Mike Smith warned last year that his bank would be forced to pass on extra costs to home borrowers if APRA boosted the capital requirement on home loans.
“Higher capital costs will come at a cost to customers who will pay more for home lending,” Mr Smith said before new rules were announced on Monday.
However, the bank refused to comment on whether borrowers would be hit with additional fees under the new capital regime.
The changes mean that ANZ will have to put aside an extra $2.3 billion in capital to support its home loan book.
National Australia Bank has pre-empted the new rules by issuing more shares to meet the new capital requirements.
But the bank has not ruled out retrieving some of the costs from borrowers.
“Today’s announcement by APRA of an increase in mortgage risk weights aligns with our expectations,” said NAB senior executive, Craig Drummond.
“NAB has built a capital buffer in anticipation of such changes, making it well placed to respond to changes in regulatory capital requirements.”
Reforms will level competition in the mortgage market
If your home loan is with a regional bank or credit union, the new capital rules will not affect your home loan.
Lenders such as Bendigo Bank, ME Bank and Bank of Queensland are already required to put aside more regulatory capital on the home loans they provide.
However, the new rules could have an impact on competition in the home loan market because major banks will find it increasingly difficult to compete against non-bank lenders that are not regulated by APRA.