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Pressure on house prices could ease if the big four are forced to raise $18b in capital

27 May 2015

The big four banks might have to raise $18 billion of new capital as the Australian Prudential Regulation Authority continues to look at implementing recommendations from the financial system inquiry. 

The moves, if implemented, could curb the growth in home lending spurred on by ongoing low interest rates, which could in turn reduce pressure on house prices. 

A report this week from Standard & Poor said that if APRA applies requirements for the big banks to use higher average risk weightings for home lending, it would result in a higher level of capital held against mortgage loans across the entire industry. 

S&P said this would be a positive thing for the Australian banking system amid so much concern about rapidly increasing property prices in Melbourne and Sydney. 

In The Age, James Cummings said that if banks were proactive about capital raising it would reduce the cost of that equity, and that higher levels of equity capital would result in only tiny increases in overall borrowing costs for bank customers.

This was because the cost of equity would fall as banks built higher capital buffers. 

APRA chairman Wayne Byres has recently said they would act in the near term to lift mortgage risk weightings, a recommendation by financial inquiry chairman David Murray. 

According to S&P, the big four banks would need to raise $18 billion in new capital to maintain their current common equity Tier 1 (CET1) capital ratios if APRA go ahead and lift average risk weighting for residential mortgages from 18 per cent currently to 27.5 per cent. 

The flashpoint for the move could come in June, when global bank regulator the Basel Committee on Banking Supervision will meet and examine whether bank risk models result in too little capital to protect the system from financial crises.

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