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Banking regulator labels SME loans ‘higher risk’

Banking regulator labels SME loans ‘higher risk’

In its efforts to make Australian banks ‘unquestionably strong’, the banking regulator has argued lenders should hold more capital against loans to small businesses.

In its efforts to make Australian banks ‘unquestionably strong’, the banking regulator has argued lenders should hold more capital against loans to small businesses.

The Australian Prudential Regulation Authority (APRA) recently released a discussion paper on revisions to the capital framework for authorised deposit-taking institutions (ADIs).

It proposed to segment the standard eligible mortgage portfolio into lower-risk and higher-risk exposures in addition to assigning risk weights according to LVR.

APRA stated that SME exposures secured by residential property that meet certain serviceability criteria would be included in the same category of exposures as residential mortgages for investment purposes and interest-only loans.

“In APRA’s experience, these exposures have historically had higher losses than non-SME owner-occupier residential mortgage exposures,” the regulator said.

For SME exposures that are not secured by property, APRA proposes to reduce the 100 per cent risk weight currently applied under APS 112 to 85 per cent.

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“This gives some recognition to the various types of collateral, other than property, that SMEs provide as security,” the regulator said.

“APRA does not propose to implement the Basel III 75 per cent risk weight for retail SME exposures, as there is insufficient empirical evidence that retail SME exposures in Australia exhibit a lower default or loss experience through the cycle than corporate SME exposures.

“SME exposures in this category would be limited to corporate entities where consolidated group sales are less than or equal to $50 million.”

Banking regulator labels SME loans ‘higher risk’
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