All ADIs should be operating with a buffer of at least 3.0 percentage points over the loan interest rate by end of the month, APRA announced yesterday.
The buffer "provides an important contingency for rises in interest rates over the life of the loan, as well as for any unforeseen changes in a borrower’s income or expenses," APRA said.
Where ADIs continue to approve loans using a lower buffer rate beyond the end of October 2021, APRA said it would adjust individual prudential capital requirements "to reflect higher credit risk inherent in new lending" – and governance failures too, they could well have added.
The curiosity in this story is in Commonwealth Bank's ineffective attempts to ginger the pack along, for reasons of prudent lending standards rather than (as is so often the case) short term profit maximisation.
APRA pointed to the increase in higher debt to income (DTI) lending which had increased above 20 per cent of new lending in the June half (from sub-15 per cent in June 2019).
Even with record low interest rates and increasing levels of lending at high multiples of borrower income, "most ADIs have made no changes to their serviceability buffers and have let floor rates atrophy," APRA said.
"APRA therefore also requests ADIs to review their risk appetites for lending at high debt-to-income ratios.
"While the use of a higher serviceability buffer will reduce risks for individual borrowers, growing portfolio concentrations of high debt-to-income loans also need to be monitored closely.
"Should concentrations of this lending continue to rise, APRA would consider the need for further macroprudential measures," the regulator said, an echo of the main message last week from the Council of Financial Regulators.
Brendon Cooper, one of Westpac's economics team, walked through the context at Westpac IQ.
"APRA last put through a change to serviceability standards in July 2019 when the interest rate buffer was increased from 2.0 per cent to 2.5 per cent, however this was during a time of declining interest rates and in conjunction with the lift the buffer, APRA also abolished its formal interest rate floor of 7 per cent, allowing banks to set their own floors," Cooper wrote.
"At present, those floors sit around 5.0-5.25 per cent.
"In terms of impact, APRA suggested that the lift to 3.0 per cent would result in a ~5 per cent decline in borrowing capacity for the typical borrower, however in line with its planning, there will be a greater impact on investor lending than owner occupied (refer first set of charts below).
"One of the notable features of the current increase in house prices has been the dominance of owner-occupied lending and APRA is now setting itself to rein in any further pressure that may be applied as investor growth accelerates."
APRA wrapped out its letter to ADIs yesterday with fangs out.
In addition to these near-term measures, APRA said it is "also taking steps to ensure that macroprudential policy more broadly is placed on a sound longer-term footing. Later this year, APRA plans to publish an information paper