Higher capital requirements could hit your home loan rate

Adam Smith 5 July 2016

money graphRate rises could be a reality if banks are forced to hold more capital, as tipped by Australia’s regulator.

The Australian Prudential Regulation Authority (APRA) has warned that the major banks may have to hold higher levels of capital, the Sydney Morning Herald has reported. In spite of raising about $18 billion in new equity last year, an APRA paper has warned that banks will likely have to increase their capital buffers.

APRA’s study found Australia’s major banks are now in the top 25% of banks internationally for tier 1 capital. But APRA warned that global banking regulators were likely to introduce new rules increasing the amount of capital banks must hold.

"The major banks have undertaken significant capital raisings since the 2015 study, which has significantly improved their capital adequacy position relative to international peers. That said, the trend of international peer banks strengthening their capital ratios continues,” APRA said in its policy paper.

"Forthcoming international policy developments will also likely mean that Australian banks need to continue to improve their capital ratios in order to at least maintain, if not improve, their relative positioning."

Higher capital levels would safeguard banks in case of financial shock, but would also lead to lower levels of profitability. This could see banks recoup this loss by hitting home loan customers with higher rates.

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