APRA holds firm with 3% loan serviceability buffer

APRA has announced the 3% serviceability buffer for home loans will remain in place, citing the “potential for further interest rate rises, high inflation and risks in the labour market”.

The Australian Prudential Regulation Authority on Monday published an update on its macroprudential policy settings, explaining the key factors that have informed current levels.

It said the information paper provided greater transparency on macroprudential policy in line with APRA’s new framework which was published in 2021.

APRA said macroprudential policy was an important feature of  its toolkit. It involves policy measures aimed at promoting stability at a systemic level.

In the information paper, APRA confirmed its view that existing policy settings remain appropriate based on the current risk outlook. The operative settings are:

• a neutral level for the countercyclical capital buffer of 1%t of risk weighted assets, providing a buffer in bank capital for stress if needed; and
• 3% serviceability buffer to maintain prudent lending standards.

APRA Chair John Lonsdale (pictured above) said the settings remained appropriate given the potential for domestic and global economic conditions to deteriorate.

“APRA closely monitors financial risks, and we see a high degree of uncertainty in the broader outlook, globally and domestically,” Lonsdale said.

“On the one hand, there are signs of a deterioration in conditions, including falling asset prices and the potential for pockets of stress. On the other hand, lending standards are broadly sound, loan arrears remain low and the banking system is well capitalised.

“On that basis, we believe our current macroprudential policy settings remain appropriate. In particular APRA’s view is that the 3% level remains prudent given the potential for further interest rate rises, high inflation and risks in the labour market.

However, Lonsdale said the settings “are not set in stone”.

The events of recent years have emphasised that conditions can change rapidly,” he said. “We continue to closely monitor the outlook for credit growth, asset prices, lending conditions and financial resilience.”

Lonsdale said should risks to financial stability change, APRA would adjust its macroprudential policy settings accordingly after careful consideration and consultation with other agencies on the Council of Financial Regulators.