Should the Capital Requirement on Housing Lending be Reduced? Evidence From Australian Banks
In its recent submissions to the Basel Committee on Banking Supervision, the Australian Prudential Regulation Authority argued that the risk weight on lending secured by residential mortgage should be reduced from 50% to 20%. Using Australian banking data, we estimate the relative riskiness of assets according to their regulatory imposed risk weights. The results suggest that for an average Australian bank over the period 1991 to 2001, a 10 percentage point shift in assets, from the 50% to 100% risk weight bucket, resulted in a 30% increase in the ratio of impaired assets to total assets, and a 45% (relative to the mean) increase in the ratio of credit losses to total assets. There is however no significant difference in risk associated with varying the proportion of assets held between the 20% and 50% risk weight buckets. This suggests the current 50% risk weight on housing lending may be excessive. Both authors are from the Australian Prudential Regulation Authority, Level 26, 400 George Street, Sydney NSW 2000. Ph: 612 9210 3345; Fax: 612 9210 3410. Email: firstname.lastname@example.org; email@example.com. The views and opinions expressed in this paper are those of the authors and do not necessarily reflect those of APRA. The authors would like to thank Bob Allen, Wayne Byres, Charles Littrell, Anthony Coleman, Marianne Gizycki, Glenn Homan, Bill Jones, Murray Jones, Terry Pittorino and Ian Sharpe for helpful comments.
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