It is confirmed that APRA are seeking to impose a doubling of the minimum capital required for home loans – the banks have all received their letters confirming this over the last couple of days. This will mean two things – a home loan will be both more expensive and difficult to get in Australia.
As background (and without getting too technical) the amount of capital (the safety margin, in a way) that a bank is required to keep against any lending it makes is calculated based on past losses and the current economic situation. The ‘LGD’ is one of the factors in there. Double one of the factors and the safety margin doubles with it. This safety margin costs the bank money – so this is passed on in the form of increased interest charges on the home loan.
APRA have said that the floor on LGD for home loans will be 20%. This is just plain silly. There is already a level of conservatism built into the Basel II Accord, with a 10% LGD floor and to double it, without there being any form of justification other than the regulator’s gut instinct, will just be a dead-weight loss to the economy.
Over the last decade APRA have consistently tried to make home loans more expensive and difficult to get, first requiring a 20% deposit on all home loans to qualify for preferential treatment, then discouraging the low-doc style home loans and now this.
If there were some justification in the loss history I could understand it – but this is not the case. The only justification seems to be the fear that losses may increase at some stage in the future. If this sort of regulatory game playing purely to keep APRA happy becomes common the banks may as well stop lending for housing.
Shall we call this one the skid-mark factor?