• 14/06/2024

APRA war games credit restrictions as household debt rises

James Frost and John Kehoe| Australian Financial Review| 17 June 2021


The peak group of financial regulators have eyeballed the pick-up in home lending and the return of property investors as an emerging issue, with the boards of major banks asked to pledge they are maintaining lending standards and provide data proving they are being responsible.

The quarterly statement from the Council of Financial Regulators – which includes the Reserve Bank of Australia, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission and Treasury – flagged the shift in the composition of lending as a potential turning point.

APRA has asked lenders for assurances they are maintaining high lending standards. 

The CFR statement also said it was paying attention to the high levels of household debt as well as “policy options” that could be deployed to address those risks.

Separately on Thursday, RBA governor Philip Lowe said future potential macroprudential policy options that APRA was exploring included restrictions on debt-to-income ratios and loan-to-value ratios, and tougher rules for interest-only and investor lending like between 2014 and 2018.

“We’re not at the point where we’re actively considering implementing any initiatives in this area, but we’re doing the preparation for what might happen, what we might do if credit growth was accelerating,” Dr Lowe said following a speech in Toowoomba, Queensland.

“I don’t think it’s in the country’s interests to have an extended period where credit growth is running way ahead of growth in our incomes, particularly given the high levels of debt.”

While the CFR said lending standards in Australia remained solid, it observed “signs of increased risk-taking” and “reiterated the need for lending standards to remain sound” prompting the prudential regulator to seek additional guarantees and information from lenders.

“APRA has written to the largest authorised deposit-taking institutions (ADIs) to seek assurances that they are proactively managing risks within their housing loan portfolios, and will maintain a strong focus on lending standards and lenders’ risk appetites,” the CFR said in its quarterly statement.

The CFR noted that housing credit growth was expected to remain strong against the backdrop of low interest rates and rising house prices. Australia recorded the fourth strongest house price growth out of any advanced economy over the past 20 years, according a recent report from the OECD.

The prudential regulator is understood to have written to Australia’s 14 biggest lenders in late April or early May asking for more data.

APRA deputy chairman John Lonsdale said the regulator had asked for assurances that buffers used by lenders were being maintained in a speech on May 4.

“All boards should be closely monitoring their lending standards, comfortable with their risk appetite and testing whether serviceability policies used to assess borrowers remain prudent in an environment of extremely low interest rates,” Mr Lonsdale said.

During that speech Mr Lonsdale highlighted an increase in lending with a loan-to-valuation ratio greater than or equal to 90 per cent in both the mutual and non-mutual sector asking whether lenders were taking on more risk in pursuit of market share.

“As I mentioned at the outset, it’s critical in the current environment of heightened risk that boards remain highly attuned to shifts in the composition of their lending book,” Mr Lonsdale said.

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