Financial reform work by APRA
As the governing body of the finance industry – APRA has been making changes for some time now. The latest has raised capital requirements for Australia’s major banks.
“The announcement is the culmination of nearly a decade’s financial reform work aimed at building capital strength in the financial system following the global financial crisis,” said APRA chairman Wayne Byres, “Australia has a robust and profitable banking industry and APRA believes this latest capital strengthening can be achieved in an orderly way.”
The changes to interest only loans earlier in the year was another of the changes APRA introduced to reduce debt. Namely increasing rates on loans with interest only payments and making the criteria harder for investors looking to increase their lending/portfolio’s. All of these changes are as a result of APRA’s quest to be “unquestionably strong”.
By January 2020, the majors and Macquarie will need to have a CET1 capital ratio of at least 10.5%, up 150bp on its previous level. Other banks have had their capital ratios raised by around 50bp. Since the Financial System Inquiry in 2014 capital ratios have increased by almost 250bp and been used by some banks to justify rate increases.
Potential for 20-25bp rate rise
According to Martin North, principal of Digital Finance Analytics, increased capital requirements will make loans more expensive.
Banks do not need to reach the new capital ratios until 2020 and so any rate hikes could be delayed.
Opportunity for the non-majors
Morrison has suggested that increased competition could offer consumers protection from rate increases, as capital ratios haven’t increased as much for non-major banks.
Nevertheless, the non-majors will need to increase capital ratios and deal with the costs of doing so.
Confusion
So all of this means that the finance industry in Australia is robust and strong – Good news.
What it does mean is that there is potential for interest rates to rise – we all knew that would happen. Just a case of when and by how much.
It is time to look at locking some of your lending away on fixed rates if you know what you are doing with your homes and investments. For example – Westpac are lifting their fixed rates 1/8/17. So time to rate lock if you are in the process of doing any lending.
There is confusion over interest only or principal and interest payments. Definitely better rates available if you pay Principal and Interest payments – below 4%. However it will increase your outlay each month so it does come down to cash flow. If your loans are currently interest only then a health check is in order.
Donna-Lee Parkes