The Australian Prudential Regulation Authority has drawn a distinction between the way it applies macroprudential policy to regulated and non-regulated lenders, saying its objectives for non-ADI lenders are “narrower” than for APRA-regulated entities.
Following its direction to ADIs last month to increase their mortgage serviceability buffers from 2.5 to 3 per cent, the regulator has released an information paper on its macroprudential policy framework.
One of the questions raised in response to last month’s macro intervention in the overheating housing finance market was why APRA did not include non-ADIs in its directive.
APRA says that “in certain cases” its macroprudential policy measures can be extended to non-APRA regulated lenders. Those cases occur where their provision of finance is materially contributing to risks of instability in the Australian financial system.
The difference in its approaches is that in implementing macroprudential policy for non-ADI lenders, it would be seeking to reduce the contribution of those entities to financial stability risks; while for APRA-regulated entities, it would also be concerned with the entities’ own resilience.
APRA said that in most cases, macroprudential measures relating to lending would “typically apply in the first instance only to APRA-regulated entities”.
It would subject non-ADI lenders to heightened oversight to get a better view of the risks and determine whether non-ADIs are contributing to financial stability risks. It would consult with ASIC and other members of the Council of Financial Regulators.
Before implementing macro policy for non-APRA regulated lenders, APRA would look at their market share in the lending segments under review; their lending practices, to determine whether they are contributing to weaker standards; and any spill-over effects that a reduction in higher risk lending by APRA-regulated lenders would have, such as a flow of business to non-ADI lenders that would reduce the effectiveness of the macro measures.
The information paper details a wide ranging macroprudential toolkit, which includes capital measures (countercyclical buffers, dynamic provisions, restrictions on capital distributions), credit measures (lending limits, minimum lending standards), liquidity or market measures (reserve requirements, caps on loan-to-deposit ratios, net stable funding ratio requirements) and “structure” measures (interbank exposure limits, counterparty concentration limits).
APRA concedes that the scope of macroprudential policy is broad but macro measures, unlike prudential measures, are temporary or adjusted over time.
The paper also provides a few scenarios, explaining how APRA would determine that risks to financial stability have become excessive in periods of asset price and credit growth and periods of deteriorating economic conditions.