APRA has spelled out the measures it will use to set macroprudential policy, which involves limiting certain types of lending, to ensure that authorised deposit-taking institutions have systems in place to implement them efficiently.
The regulator has finalised amendments to its prudential framework to give effect to macroprudential policy measures. They have been included as an attachment to Prudential Standard APS 220, Credit Risk Management, and will take effect in September.
The macroprudential policy includes a set of limits that APRA could impose, if needed, to address risks to financial stability. The regulator’s aim is that, by identifying specific measures, ADIs will be “pre-positioned in advance” and avoid any barriers to timely and effective implementation.
ADIs will be given one month’s notice before any lending limits are imposed.
The credit measures in the policy include an ongoing serviceability buffer of at least 3 per cent over a loan’s interest rate, unless the minimum buffer is varied by APRA. APRA may set the minimum level of the buffer between 2 and 5 per cent.
For residential mortgage lending, an ADI must ensure that it has the ability to limit the extent of lending where:
• the debt-to-income ratio is greater than four times or six times;
• the loan-to-valuation ratio is equal to or greater than 80 per cent or 90 per cent;
• lending is for the purpose of investment;
• lending is on an interest-only basis; and
• lending that includes a combination of any two of the types specified above.
For commercial property lending, an ADI must ensure it has the ability to limit the extent of lending where the loan is for land acquisition, development or construction and where the loan is for the purpose of investment.
Student loans and buy now pay later debts will be included in the calculation of debt-to-income ratios.
One of the issues raised in consultation over the new measures was that certain loan types should be subject to carve-outs from lending limits. One example was construction lending, which should be excluded from limits on high debt-to-income lending, given its role in contributing to housing supply and economic activity.
APRA said it did not want to narrow its options with specific carve-outs when future risks are not known.
ADIs asked for greater clarity on questions such as whether limits would apply to total loans outstanding or only new loans.
APRA said the design of lending limits would have to be appropriate to the risks at the time.
It also rejected a push from smaller ADIs to be given greater leeway, given their smaller balance sheets.
APRA’s macroprudential track record includes the following:
• in December 2014, APRA wrote to ADIs saying that investor mortgage portfolio growth "materially above a threshold of 10 per cent" would be seen as "an important risk indicator" in considering the need for further action;
• it also recommended that lenders tighten their serviceability buffers, which included an interest rate floor of 7 per cent and a buffer of at least 2 per cent above the loan rate;
• in March 2017, it asked ADIs to limit new interest-only mortgage lending to no more than 30 per cent of total new residential mortgage lending;
• it also told ADIs it expected them to place “strict internal limits’ on the volume of interest-only lending at loan-to-valuation ratios above 80 per cent and ensure “strong justification” if any instances of interest-only ending at LVRs above 90 per cent;
• in April 2018, it removed the 10 per cent investor loan benchmark, conditional on banks providing assurance of ongoing safe lending practices;
• in December 2018, it removed the 30 per cent interest-only benchmark, stating that the measure had served its purpose in reducing interest-only lending;
• in July 2019, it removed the 7 per cent interest rate floor (which in practice was 7.25 per cent) and increased the buffer to 2.5 per cent when assessing a home loan application (ADIs were permitted to set their own minimum interest rate floors); and
• in October last year, APRA increased the minimum serviceability buffer to 3 per cent.