Mortgage sector getting stronger, but more work required

Australia’s banks have been told they need “more than just plenty of capital” to be "unquestionably strong" players in the housing market.

While the capital position of the country’s mortgage lenders is an important measure of their strength, a broader perspective needs to be taken, according to Wayne Byres, chairman of APRA, Australia’s prudential banking regulator.

"It’s important we don’t lose sight of the fact that an unquestionably strong bank requires more than just plenty of capital. In banking, asset quality, liquidity and funding, earnings and management quality are also highly relevant to financial strength," he said.

“If a bank is weak in these areas, a strong capital position won’t last long. What is ‘unquestionably strong’, therefore, needs to be viewed in the context of the other risks to which a bank is exposed and the environment in which it operates.”

A bank’s ability to handle a period of severe adversity is another key consideration in demonstrating whether or not a bank is ‘unquestionably strong’, according to Mr Byres.

Mr Byres said the financial health and resilience of the banking sector has improved – but added that it is unclear how much has been due to regulation and how much due to more prudent management or market pressure.

“Regardless, the banking sector has been able to adjust and respond to the changes in the regulatory framework, and the broader financial environment, in an orderly fashion,” he said.

“That said, there are still some challenges and risks to grapple with, a few more regulatory changes in the pipeline, and the environment will inevitably evolve further.”

Mr Byres’ comments come as Australia’s major banks look to strengthen their mortgage books through a series of capital raisings.

Last month, ANZ and Commonwealth Bank announced plans to raise $2.5 billion and $3 billion respectively through retail shareholders. However, recent volatility in financial markets meant that Commonwealth Bank was only able to raise $1.5 billion.

NAB announced a $5.5 billion capital raising in May and Westpac raised $2 billion in the same month through its dividend reinvestment plan.

[Related: APRA issues warning on home lending]

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