Articles by Salesh Chand

Impact of bank capital requirements on funding

Friday, December 13, 2019

As many investors will already know, banks have been steadily tightening their lending criteria, making it more challenging to borrow. And soon, when the new capital requirement rules for banks come into effect next year, this is only going to get harder. 

Capital requirements for the major banks will be increased from 10% to 18% over the next seven years, meaning they will collectively need to raise and hold an extra $20 billion. That’s $20 billion less that they can lend to businesses and investors. The increased capital requirements are expected to result in a rise in interest rates of between 20–40 basis points (0.2%–0.4%).   

So what does this mean for business owners and property investors? To minimise the effect this will have on your ability to borrow money, you need to get your financial affairs in order. And you need to do this now, not later. We suggest the following strategy:
Organise maximum overdraft facilities ASAP. Chances are that the banks will have a reduced appetite for offering overdraft facilities moving forward due to the increased cost of providing them. 
Avoid purchasing assets on finance or hire purchase prior to getting your overdraft sorted, as this will impact your serviceability and may result in a lower overdraft facility. 
Once you have arranged your maximum overdraft, get all your credit cards in place. Don’t do this the other way around because it will have an effect on the amount of overdraft facility you can get. 

In summary, the new rules will make it harder for investors and businesses to borrow, but there are things you can do now to reduce the impact this will have on you. However, you’ll need to act fairly quickly. Contact your mortgage broker for more advice.