The reason why Bank debt is getting more expensive, whilst leverage is reducing, and covenants are increasing!


The underlying reason why the banks are getting more and more expensive in providing the same level of debt is clearly evidenced in the below chart.

The increased capital ratios are being driven by the Basel reforms. For those who aren’t fully informed of what these reforms include, the Bank of International Settlements (BIS) advises, “Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. The measures aim to strengthen the regulation, supervision and risk management of banks2”. As evidenced above, Total Tier Capital (per green line) for Banks has increased by a significant 50% from ~10% in 2008 to ~15% at present. It is also noted that capital is not uniformly distributed across all banking products. For example, bank’s Risk Weighted Assets (RWA) allocation to residential home loans is between 20% and 50%, depending on LVR. However, in relation to development finance facilities, RWA is 100% to 150% depending on the LVR and pre-sales3. APRA uses RWA to determine the amount of regulatory capital that must be held by banks – which as evidenced above, has increased significantly.

This is coupled with APRA insisting that Banks reduce their leverage against real estate assets and strengthen loan covenants in order to make the Banks ‘unquestionably strong’4.

This has resulted in banking exposures to real estate development finance reducing significantly whilst its cost has increased. Accordingly, the private lending market is expected to remain as a staple in Australia and provide a direct alternative to the banks. Internationally, non-ADI lenders account for approximately 40% to 50% of the total assets within Europe and the USA respectively, compared to only 7% in Australia5.

BPFM focuses solely on providing first mortgage development finance with a targeted maximum 65% LVR. Our specialist property finance team have a strong understanding of risks associated with development finance and provide a tailored funding package to experienced developers.


  1. RBA Chart Pack, September 2019 and APRA
  2. Bank of International Settlements (, accessed 2 October 2019
  3. APRA – ADI Capital Framework, available here, 12 June 2019
  4. APRA announces ‘unquestionably strong’ capital benchmarks, 19 July 2017
  5. RBA, Financial Stability Review – October 2018, 3. The Australian Financial System

Get industry updates directly to your inbox