The APRA recently increased how much capital financial institutions will have to hold on hand. Has that changed the interest rate they’re willing to pay on your savings?
What are the new capital adequacy requirements?
APRA has ordered one set of authorised deposit-taking institutions (financial institutions that hold deposit accounts) to increase their risk weighting on Australian residential mortgages from 16% up to at least 25%.
Essentially, banks will be required to hold billions of extra dollars in capital (cash). This is designed to balance the risk of the many mortgages they are lending out.
The new requirements target those institutions that are accredited to use the internal ratings-based (IRB) approach to credit risk: the Big 4 (ANZ Bank, CommBank, NAB, Westpac) and Macquarie Bank. The extra capital needed amounts to about $11 billion across the Big 4.
These new requirements don’t affect every financial institution. Standardised banks are already required to hold more capital than this anyway, with average risk weights of 39% on residential mortgages.
Regional banks rejoiced about the new rules because they mean a more level playing field in terms of competition between institutions.
The change was introduced in June 2015 and will come into effect soon – on July 1, 2016. Banks are already responding, though, with APRA’s latest figures showing the capital adequacy ratio for ADIs overall had improved from 12.5% in December 2014 to 13.9% in December 2015.
The Financial Systems Inquiry had actually recommended that risk weights were raised further, up to between 25% and 30%, for the sake of competition. But APRA has stated that the 25% benchmark is only an interim measure, as they are waiting to create the final regulations when the Basel Committee finishes its broader review of global capital adequacy.
What does this mean for you?
The changes don’t come into legal effect until the 1st of July 2016, but we have already seen institutions moving to meet the changes.
As you can see from the table below, since the announcement of the upcoming changes, interest rates have dropped significantly for at-call savings accounts, by as much as 0.25% in some cases. However, when it comes to term deposits, interest rates have increased by as much as 0.35% in some cases.
Why is this? In simple terms, the banks now need to keep more cash on hand. A term deposit allows them to have certainty about how much cash they have at any given time, whereas the balance in an at-call savings account can go up and down daily.
To achieve stability, the banks are first passing on the cost of holding more capital to their customers and shareholders by lowering return rates on savings accounts. Westpac told the ASX early on that it expected to pass the costs of its extra $3 billion on to customers and shareholders in this way.
Secondly, they are offering higher interest rates on term deposit accounts, bringing more cash into the vault and keeping it there for a longer timeframe.
|Rates as at 1st of July 2015|
|Institution||At-call Bonus Savings Account||At-call Standard Savings Account||90 Day Term Deposit||180 Day Term Deposit||270 Day Term Deposit|
|Base Rate||Total Rate|
|Rates as at 1st of April 2016|
|Institution||At-call Bonus Savings Accounts||At-call Standard Savings Account||90 Day Term Deposit||180 Day Term Deposit||270 Day Term Deposit|
|Base Rate||Total Rate|
|Rates are based on a balance of $50,000.
No matter which institution or savings account you choose, make sure you compare your options first. You can use our website to compare savings accounts across a broad range of interest rates, features and fees.