Risk-Based Capital Requirement in Australia: 2025 Changes & Impacts

Australia’s financial sector is no stranger to regulation, but 2025 is shaping up to be a year of significant change. Risk-based capital requirements—a fundamental pillar of banking and lending—are being recalibrated as policymakers respond to global economic trends and domestic priorities. But what does that mean for lenders, borrowers, and the wider Australian economy?

What Are Risk-Based Capital Requirements?

Risk-based capital requirements determine how much capital banks and lenders must hold against the risks on their balance sheets. Instead of a one-size-fits-all minimum, these requirements adjust based on the riskiness of assets—like home loans, business loans, or investments. The riskier the asset, the more capital a lender needs to set aside. This system is designed to ensure financial institutions remain resilient in turbulent times, protecting both depositors and the broader economy.

In Australia, these requirements are overseen by the Australian Prudential Regulation Authority (APRA), in alignment with international standards such as Basel III and the evolving Basel IV frameworks.

Key 2025 Policy Updates: What’s Changing?

APRA has announced a suite of changes to capital adequacy rules that will start taking effect in 2025. The focus is on strengthening the financial system’s ability to absorb shocks, particularly as economic uncertainty persists globally. Here’s what’s on the radar:

• Revised risk weightings: Home loans with higher loan-to-value ratios (LVRs) will require more capital backing, while low-risk, well-documented loans may see lighter requirements.
• Increased capital buffers: Lenders must hold larger capital buffers to cover potential losses, with special attention to sectors showing signs of volatility—such as commercial real estate and small business lending.
• Climate risk integration: For the first time, APRA is requiring lenders to factor in climate-related financial risks, leading to additional capital charges for assets exposed to climate vulnerabilities.
• Proportionality for smaller lenders: Regional banks and credit unions will benefit from simplified frameworks, reducing compliance costs but still maintaining prudential soundness.

These changes are aligned with global trends as regulators worldwide respond to lessons from recent financial crises and the growing need for sustainable finance.

How Will This Affect Lenders and Borrowers?

The new risk-based capital regime will ripple through the Australian financial landscape in several ways:

• Mortgage pricing shifts: Borrowers with low deposits or higher-risk profiles may see higher interest rates as lenders pass on the increased cost of holding capital. On the flip side, those with strong credit and substantial deposits could benefit from more competitive offers.
• Credit tightening in vulnerable sectors: Sectors flagged as higher risk—such as commercial property or certain business loans—may experience stricter lending criteria or reduced credit availability, as lenders manage their capital allocations more cautiously.
• More resilient banking sector: For depositors and investors, the upside is a more robust and shock-resistant financial system, reducing the risk of institutional failures that could ripple through the economy.
• Innovation opportunities: Smaller lenders, freed from some compliance burdens, may introduce new products or digital solutions to attract niche segments.

For example, a first-home buyer in Sydney with a 5% deposit may find it harder or more expensive to secure a loan, while a seasoned investor with a diversified portfolio might benefit from more favourable rates. Meanwhile, a small regional bank could find it easier to compete with the major banks thanks to streamlined capital rules.

Looking Ahead: Navigating the New Normal

As Australia moves into 2025, risk-based capital requirements will remain a central lever for financial stability. For lenders, this means ongoing investments in risk management, data analytics, and compliance systems. For borrowers, it pays to understand how your risk profile affects borrowing costs and to shop around as competition evolves.

Ultimately, these changes aim to strike a balance: protecting the financial system without stifling access to credit. Whether you’re a lender, borrower, or investor, staying informed about these shifts is crucial to making smart financial decisions in the new regulatory environment.