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Leon Gettler
Business Journalist

Leon Gettler is an independent journalist, author and public speaker

Leon Gettler
Business Journalist

Leon Gettler is an independent journalist, author and public speaker

Regulatory requirements put onto the big four and Macquarie Group mean big changes for the financial sector.

The big issue affecting the finance industry over the next three months is the fallout from the Australian Prudential Regulation Authority’s (APRA) announcement in July that the big four banks and Macquarie Group will have to carry more capital against mortgages to safeguard the country’s financial system and ensure the banks are in a better position to resist the next financial crisis.

It requires the banks to increase the average risk weighting for home loans from around 16 per cent  – where for each dollar loaned out they hold 16 cents in capital – to 25 per cent. The result is that the banks will have to find approximately another $11 billion.

The side of a tall glass office building as seen from ground level

What impact will it have?

Kevin Nixon, the lead partner of the Deloitte Asia Pacific Centre for Regulatory Strategy says we have already started seeing an impact with the banks raising their interest rates on investor loans.

“That’s a quarter of a percentage point rise on the loans without any moves from the Reserve Bank,’’ he says.

“That achieved two things: It moved up the profitability of the investor home loan to offset the higher capital, and at the same time plays directly to APRA’s desire for some of the investor lending to cool somewhat in the market place.” 

What’s the impact on financial services growth?

Nixon says it could be a challenging time for financial services.

“I am not a banking analyst, but you don’t need to look too far into the banking analyst community to see generally there is an expectation of a downward trend on return on equity,’’ he says.

“When the capital required against a mortgage book goes from an average 16 to an average of 25, that’s a 50 per cent increase in capital on a big percentage of the bank’s books.

“The other way they can retain equity is cost cutting: you can put the price up or you can have a lower return on equity.”

How does this play out globally?

“When you look around the world, bank returns on equity are still under pressure and in many cases, particularly Europe and the US, they are in single digits,’’ he says. “Our banks are in a good position and our investors can look forward to healthy returns on equity, but you also have to look at where interest rates are.

“But you will see continued pressure on return on equity.”

What can we expect for insurance companies?

Nixon says there are no big issues confronting the insurance industry over the coming months. There is however a longer term issue which will flow through to all insurers around the world with the setting of a global standard, similar to Basel for the banks.

“Insurance companies do not have the same regime as banks with Basel,’’ he says

“Insurance companies run on national rules or in Europe, regional capital rules. There is no global capital standard

“One of the big decisions of the G20 after the crisis was that there should be a global insurance standard.”

What impact will that have here? Not much, he says.

“There won’t be too much impact on Australia as what they will produce will not be that different from what Australia does already.”

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