APRA has begun moving on recommendations made in the Financial System Inquiry (FSI), targeting bank resilience and a competitive market in its first response.

From 1 July next year the big four banks and Macquarie Bank will have to hold mandated residential average weighted risk capital reserves of at least 25%, compared to self-imposed reserves of about 16% currently.

The change fits within the FSI recommendation of between 25-30% and applies only to banks that can set their own mortgage risk weightings.

Other lenders use a standardised formula for risk weightings, which subjects them to a minimum 35% retention of capital on their loan books.

Lobbying fails to stymie regulator

The big four banks have a combined residential mortgage book of $1.04 trillion, and had lobbied for changes to be delayed for 12 months, until the Switzerland-based Basel Committee makes its recommendations on global capital adequacy requirements under Basel IV.

Earlier this month, APRA released an international bank peer study, that determined Australia’s major banks needed to increase capital adequacy ratios (CARs) by at least 200% to become “unquestionably strong”, and be cemented in the top quartile of international banks.

APRA said shifting the CAR’s goal posts was the equivalent of increasing minimum capital requirements for the targeted banks by 80 basis points.

Further adjustments to the provisions will depend on outcomes from the Basel review, which are not expected before year end, according to APRA.

Government slow to respond

The David Murray chaired Financial System Inquiry's final report was released by the Treasury in December 2014. It elicited 185 submissions from corporations and individuals, which the government is reviewing before acting on 44 key recommendations.

Another key recommendation was for the establishment of a national strategy for a federated style model of trusted digital identities.

It also proposed the establishment of a Financial Regulator Assessment Board to advise government on how financial regulators implement their mandates.

And to bridge the gap between major system inquiries the FSI suggested a review into competition within the financial system every three years. The Murray inquiry was preceded by the (Stan) Wallis report in 1997, and the (Keith) Campbell report in 1981.

In mid-June Finance Minister Mathias Corman said in a media comment that a government reply to the FSI was “still months away, prompting Murray to suggest the government speed up its response to minimise market uncertainty.

Regulators get ahead of curve

However, responsibility for a number of the recommendations are the remit of the financial regulators - APRA, ASIC and the RBA, and each of the regulators has commenced its own review of the recommendations.

The RBA’s Payments System Board (PSB) is currently conducting a review of the regulatory framework of credit card payments, with input sought from industry and stakeholders.

While an extended period of consultation is proposed for changes in areas like interchange fee regulation, the PSB has indicated its wants to move quickly on changes to surcharge regulation, to ensure customers using lower cost payment methods pay an appropriately lower surcharge.

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