APRA has released the final framework confirming its changes to lending conditions. The new rules came into effect at the beginning of November, with a further, system-wide policy framework following late last week.
“Unlike our day-to-day supervision of individual entities, macroprudential policies allow us to target risks to the entire financial system; whether it be curbing excessive risk-taking in a buoyant market, or conversely encouraging investment and economic activity during a downturn,” said APRA Chair Wayne Byres.
“APRA has a wide range of tools it could potentially deploy in such circumstances. Today’s paper is intended to give financial industry stakeholders a better understanding of the factors APRA considers in making decisions to use these tools, the types of macroprudential measures APRA could deploy in the future, and how they might be implemented.”
For brokers, there were some key takeaways. First, there was the news that APRA might yet tighten lending rules further, with Wayne Byres sending a letter to banks that warned them off risky lending.
“The purpose of temporary lending limits would be to moderate any excessive growth in higher-risk lending during periods of heightened systemic risks,” he wrote.
“The specific calibration and start date for any limit would be advised by APRA at the time, taking into account the risk outlook.”
“Together with other members of the Council of Financial Regulators, APRA continues to closely monitor risks in residential mortgage lending.”
Secondly, the identification of high house prices as a factor in decision making could also be seen, with the report laying bare that the speed of house price rises would be taken into account when considering if further steps needed to be taken by regulators.
The divide between banks and non-banks was also important. APRA has more control over the actions of ADIs and does not apply the same scrutiny to non-banks, but said that it could extend its oversight should they take a larger market share of at-risk loans.
“APRA would subject non-ADI lenders to heightened oversight to gain better visibility of
risks in the sector, alongside (or prior to) the implementation of any macroprudential
measures for ADIs,” they wrote. “This could include enhanced data collections for non-ADI lender”
“If APRA subsequently determined, in consultation with ASIC and other CFR agencies,
that non-ADI lenders are also materially contributing to financial stability risks, APRA
could apply the same (or similar) credit measures to non-ADI lenders as applied to ADIs.”
They acknowledged that their actions concerning large banks had only driven customers towards smaller lenders in the past, which had itself resulted in issues as second-tier banks and non-banks struggled to deal with demand and volume.
“APRA's serviceability measures resulted in a more level playing field for ADIs’ borrower risk assessments. However, the industry-wide benchmarks on lending to investors and interest-only tended to constrain significant shifts in market share during the temporary period that the benchmarks were in effect,” they wrote.
In light of the potential competition impacts, APRA considered applying the benchmarks only to the largest ADIs, given that the activity of smaller lenders was unlikely to influence the overall risks in the system. However, this would have resulted in higher risk lending simply spilling over to the smaller ADIs, leading to a concentration of risks in smaller entities less equipped to manage them.”
“Indeed, APRA did observe this spillover effect to some degree when the benchmarks were initially
introduced. As it was, many smaller ADIs found themselves with an unanticipated surge in
demand for credit that in some cases was difficult to manage.”
“APRA sought to address concerns about smaller ADIs' ability to compete by adopting a more flexible approach to the application of the benchmarks for these ADIs, especially in the early stages. As a result, the market share of small ADIs grew through the period.”
