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The regulator has launched consultation on a package of changes to banks’ credit risk capital settings, including a proposal to halve the qualifying presales requirement for residential development lending from 100 per cent of total debt to 50 per cent.
The proposals form the first stage of a broader review of bank capital and liquidity settings, with the Australian Prudential Regulation Authority (APRA) saying the measures are designed to support lending and investment while maintaining its commitment to an “unquestionably strong” capital framework.
Presales threshold set for overhaul
Among APRA’s proposed changes is a relaxation of the qualifying presales requirement for land acquisition, development, and construction (ADC) lending.
Under the proposal, residential developments would only need qualifying presales equal to 50 per cent of total debt, down from the current requirement of 100 per cent, to qualify for the lower 100 per cent risk weight.
APRA said it had reviewed the existing criteria after industry feedback suggested the current requirements were “too restrictive”, preventing some otherwise high-quality residential developments from qualifying.
The regulator also cited market developments, including the growth of build-to-let projects and banks’ existing underwriting policies, as factors justifying the proposed changes.
For build-to-let developments, APRA is proposing to replace the presales requirement with a new pre-lease requirement. Where a project includes both build-to-sell and build-to-let components, qualifying presales and pre-lease requirements would “apply concurrently to the respective proportion of the development”.
According to APRA, the changes are expected to increase the number of residential developments eligible for the lower risk weight, reducing banks’ cost of capital for those projects and increasing their capacity to support housing supply.
APRA chair John Lonsdale said the proposals were aimed at striking a balance between reducing regulatory burden but without compromising financial stability.
“At a time of global economic and geopolitical uncertainty, we believe that Australia’s ’unquestionably strong’ bank capital framework remains appropriate to safeguard financial stability in a high-risk environment,” he said.
“But we also recognise the importance of periodically reviewing our settings to ensure that the framework is calibrated to the underlying risks and that we’re achieving the right balance between safety and stability, as well as efficiency and competition.
“By making our risk weights for some categories of corporate lending more granular and risk-sensitive, we believe we can improve the efficiency of the capital framework without compromising core prudential objectives. By reducing the amount of capital banks need to hold against these categories of loans, it should give banks greater capacity to deploy released capital in a manner that supports broader economic outcomes.”
APRA is accepting submissions on the proposals until 7 September 2026. The regulator said it intends to finalise the credit risk capital changes in the second half of 2026, with a proposed commencement date of 1 April 2027.
Other proposed changes
The consultation also proposes lower risk weights for large domestic public infrastructure lending, which APRA said would “better reflect the risk characteristics of government-linked entities” while increasing banks’ capacity to invest in assets that “boost long-term productive capacity and support economic activity”.
Furthermore, APRA also proposed a new 65 per cent risk weight for high-quality unrated corporate borrowers that are equivalent to an A- credit rating or better.
The regulator said the proposal is intended to “better differentiate genuinely stronger unrated borrowers (risk-graded as equivalent to an A- credit rating grade or better) from other investment grade borrowers”.
APRA said that the graduated approach is intended to “improve risk sensitivity while avoiding a large capital cliff effect between credit rating grades” and could “lower the cost of credit for stronger unrated borrowers, enabling ADIs the opportunity to support businesses to invest in expansion, innovation and efficiency-enhancing activities”.
[Related: ‘Fight fire with fire’: APRA’s AI warning to finance]
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