ANZ Trims Capital Ratio After APRA Review

By Glenn Dyer | More Articles by Glenn Dyer

ANZ says its core equity tier one capital ratio will take a hit of 26 basis points (0.26% or 26 cents in the dollar), after the banking regulator completed a review of its risk weighting system.

According to a statement yesterday from the ANZ it is in a strong capital position after asset sales in the past 18 months (mostly in Asia), so the bank says this will not require any additional capital management action (that’s raising more capital from selling assets or shares).

Risk weightings are models that determine how much capital banks must set aside when lending, and there is a global move to make these weightings less generous to the largest lenders such as the big four Australian banks (or banks that are either globally systemically important, such as Goldman Sachs or Bank of America, or banks that are important to a country’s financial system, such as our big four).

ANZ said APRA had finished its review of ANZ’s model, and it would be using a risk weight of slightly over 28.5% for its Australian home loan book. That effectively means ANZ can assume that when it lends out $100 to a home loan buyer, only $28.50 is at risk and has to be supported by capital.

That review was announced on August 8 last year when the ANZ said that in response to the report of the Financial System Inquiry, the regulator was looking at requiring banks using their internal ratings – those banks big enough and well managed enough to credibly do their own risk modelling (assessment and capital allocation) on lending – to hold more capital against residential mortgages:

"This follows APRA’s announcement of 20 July 2015 which advised changes to capital requirements for Australian residential mortgage exposures for IRB ADIs in response to a recommendation from the Financial Services Inquiry. The outcome of those changes was, from 1 July 2016 an increase in the average credit risk weighting applied to ANZ’s Australian residential mortgage lending from approximately 15% to approximately 25%<“ the AQNZ said last August.

"The exact increase for ANZ will not be confirmed until ANZ has submitted and had approved its new mortgage capital model, and APRA has completed its recalibration, but is expected to be within the 25% – 30% range recommended by the Financial Services Inquiry. This is expected to be effective in the First Quarter of FY2017,” according to the ANZ.

This is quite separate from APRA’s announcement (expected late this month or in July) on what the financial impact for the banks will be from the regulator’s “unquestionably strong,” target for the banks set by the Financial System Inquiry. That is going to force banks to set aside more capital – around $A16 billion to $A20 billion has been mentioned by some banking analysts.

ANZ shares eased six cents to end at $27.95 yesterday.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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