Australia's five-largest banks have been ordered by the Australian Prudential Regulation Authority, or APRA, to raise billions of dollars in spare capital which should even out the playing field for the nation's smaller banks.,
In a move that has been widely anticipated by the markets, Australia's big four banks, together with Macquarie Group Ltd (ASX: MQG), will be forced to raise more capital as a safeguard against a potential economic downturn.
The new standards will require an increase in capital to be held against residential mortgages by authorised deposit-taking institutions (ADIs) accredited to use the internal ratings-based (IRB) approach to credit risk, which includes each of the big four banks and Macquarie.
Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) have already indicated that they will need to allocate an additional $2.3 billion and $3 billion of capital to meet the new standards, respectively.
Although Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) have not provided guidance on the dollar amount they will need to raise, they have suggested they will need to increase their reserves by 0.95 per cent and between 0.8 and 0.9 per cent, respectively. According to calculations by The Motley Fool's Mike King, that could equate to roughly $3.5 billion and $3.1 billion, respectively.
Although the changes were largely expected, they will act as a restriction on the banks which will likely be forced to pass on the higher costs to customers – namely borrowers and savers. As Westpac said this morning: "While Westpac is well placed to meet these changes, increased capital does come at a cost. The cost of holding higher capital will inevitably be borne by customers and shareholders."
What this means for the regional banks
What the new restrictions on the big banks will do is help level the playing field for the nation's smaller and regional banks and allow them to become more competitive against their larger brethren.
Indeed, the big banks have used their dominance (and ability to offer more attractive loans) to grow their market share with a recent report by APRA showing that almost 84% of the mortgage market is controlled by the Big Four. That compares to just over 4% for Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN) combined.
Right now, the big banks hold an average of 16 cents for every dollar they lend, with that amount set to increase to "at least" 25 cents (with scope for further increases in the near future).
By comparison, banks such as Bank of Queensland and Bendigo and Adelaide Bank have been forced to use the "standardised" approach to modelling credit risk which requires risk weights for mortgages to not fall below 35 per cent, thus severely impacting their ability to compete with their larger rivals. The Australian shows their risk weights — the amount of capital held per dollar of loans — to be 44 per cent and 39 per cent, respectively.
Unfortunately for them however, it seems that the new restrictions may have come at a time where growth in home loans could begin to fade, meaning that they have missed out on the incredible gains recognised over the last five years or so. Indeed, tougher restrictions were certainly necessary considering how expensive property has become with APRA recognising the impact a sudden crash could potentially have on the economy as a whole.
In my opinion, now is the wrong time of the cycle to buy shares in any of the banks and investors would be wise to focus their attention elsewhere.
