February 14, 2018 / 12:07 AM / 6 days ago

UPDATE 2-Australia regulator flags new capital rules on loans

* APRA proposes changes to risk weightings on loans

* New laws require “living wills” for crisis management (Recasts, adds bank responses)

By Chris Thomas and Susan Mathew

Feb 14 (Reuters) - Australia’s banking regulator proposed on Wednesday that the country’s lenders adopt higher risk weightings on some kinds of loans as the government passed laws aimed at avoiding public bailouts of banks in a crisis.

The Australian Prudential Regulatory Authority (APRA) suggested higher risk-weightings on interest-only loans and investment loans. It proposed a lower risk weighting for loans with a lower loan-to-value ratio.

Risk weightings are designed to ensure banks put aside sufficient capital against their risks in the event of a crisis at the institution or broadly in the financial system.

The proposed changes come as Australia moves to finalise the implementation of the Basel III capital rules, which are being adopted worldwide to bolster bank defences against risk.

As part of efforts to build defences, the Australian parliament passed new laws requiring major banks to set up comprehensive “living wills”. Under these laws, banks have to draw up a plan of how they can be wound down in a financial crisis without resorting to a taxpayer-funded bailout.

Australia has lagged behind other major jurisdictions and the new legislation will bring it closer to the crisis management controls already in place in the United States.

National Australia Bank, Westpac Banking Corp , and Australia and New Zealand Banking Group, three of the country’s biggest banks, said in separate statements they were on track to meet APRA’s existing key capital requirements by the 2020 deadline.

A spokesman for Commonwealth Bank of Australia did not immediately respond to requests for comment.

APRA said on Wednesday it was also proposing to raise the minimum requirement for the leverage ratio - a non-risk measure of capital strength that operates as a backstop to the risk-weighted capital framework - to 4 percent from 3 percent. It wants to make the higher ratio a requirement from July 2019.

ANZ said it would work with the regulator to understand the impact of the proposed measurement changes.

Last July, APRA raised the core measure of a bank’s financial strength, common equity tier 1 capital, by 150 basis points to at least 10.5 percent. The banks are expected to meet the requirement by 2020.

Australian banks are under scrutiny after a government backed inquiry into the sector began earlier this week following years of scandals including interest-rate rigging, poor financial advice and accusations of breaking money laundering rules. (Reporting by Susan Mathew and Chris Thomas in BENGALURU, and Paulina Duran in SYDNEY; Editing by Stephen Coates and Neil Fullick.)

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