Sarah Simpkins| Mortgage Business| 12 November 2021
APRA runs through lending control toolkit – Mortgage Business
The prudential regulator has outlined the next intervening steps it could take, as housing prices and debt levels continue to climb.
APRA released its Macroprudential Policy Framework information paper on Thursday (11 November), setting outs its framework, options and scenarios and in which they could be applied.
The watchdog has revealed what it could do next after initially raising the minimum interest rate buffer in October, requiring banks to assess loan applications at 3 percentage points above the product rate, instead of the prior 2.5 percentage points.
The regulator’s aim is to maintain financial stability at a system-wide level.
It had previously raised concerns around a rise in high debt-to-income mortgage lending and in house prices, but its objective is financial stability, rather than housing affordability.
There are four main indicators the regulator will use to identify emerging risks to financial stability: credit growth and leverage, growth in asset prices, lending conditions and financial resilience.
APRA has also stated it has a “broad range” of macroprudential tools that it will strive to target at specific risks, including measures across capital, credit, liquidity or the market, and structur
A snapshot of the tools are as follows:
APRA has focused on risks in residential mortgage lending and commercial property lending, which account for more than 70 per cent of credit extended in Australia.
The measures may be applied temporarily or adjusted over time; they can be applied systemically or target specific entities, and they may operate countercyclically – building additional resilience and guarding against excessive risk taking in periods of exuberance.
The purpose of lending limits would be to restrain certain types of higher risk lending, APRA stated, which contribute to stability risks.
They could apply to high average lending, high loan-to-value ratio or interest-only lending.
“For key types of higher risk lending that could be subject to such limits, it is important that ADIs are appropriately pre-positioned to be able to control growth and the composition of lending, if needed,” the information paper stated.
“Some lending limits can be operationally complex to deploy and APRA expects ADIs to have addressed any impediments for implementing core measures, well in advance of risks emerging.”
APRA also acknowledged that it could implement the tools to a specific region or cohort of lenders depending on circumstances, but a “more uniform approach would generally be less likely to create competitive distortions between affected ADIs”.
The regulator could also wave through other changes for the banks, which include minimum liquidity requirements or temporary limits on exposures to certain counterparties. APRA has considered these measures in particular to be less likely and has not required the banks to prepare for them.
But the countercyclical capital buffer (CCyB) in particular could be more likely, as it has been proposed and is under consultation.
The CCyB, which applies to banks under APRA’s existing capital requirements and can be varied according to changes to the systemic risk outlook, is APRA’s primary capital-based macro measure it could use.
Under the capital adequacy prudential standard, banks must hold an additional amount of capital as an extension to the capital buffer range through the CCyB, which is held in the form of Common Equity Tier 1 Capital.
APRA could decide to increase the required capital buffer, but it would need to flag the decision 12 months before it applied. If it chose to decrease the buffer, it could apply immediately.
APRA has plans to make the CCyB more effective as a macro tool through reforms to the ADI capital framework that come into effect from 2023.
Non-banks aren’t off the hook
APRA could also stretch controls to non-bank lenders, in certain circumstances – but in most cases, it expects macroprudential measures would apply only to banks.
The regulator has powers that can be used to extend macro policy to non-ADI lenders, where their provision of finance is substantially contributing to instability risks in the financial system.
But it would have to consider a number of factors, including the size of the sector and market share; lending practices of non-banks and if they’re adding downward pressures to industry standards; and spillover effects, if a reduction in high-risk lending at banks could flow through to non-ADI lenders.
APRA has said there is a two-step process for applying macro controls to non-ADI lenders: the regulator would need to give heightened insights to improve risk visibility in the sector (which could look like enhanced data collection) and it would need to consult with other financial regulators.
The decision to roll out changes to prudential requirements will ultimately be up to APRA, but the Council of Financial Regulators will also play a role in assessing the level of systemic risk and coordinating responses across regulators.