Financial risk still too high, says APRA
Australia’s mortgage serviceability buffer will remain at 3%, the Australian Prudential Regulation Authority has announced today.
APRA said the loan buffer, which forms part of its macroprudential policy settings, would remain on hold following its latest quarterly assessment of domestic and international economic conditions.
The financial services industry regulator said its macroprudential policy toolkit was aimed at promoting stability at a systemic level to ensure financial institutions could continue to supply the credit and payment services required for the economy to grow at a sustainable rate.
The toolkit includes three core tools: the countercyclical capital buffer, the serviceability buffer and limits on bank lending.
Macroprudential policy settings
APRA said the decision meant the following:
- the countercyclical capital buffer will remain at 1% of risk weighted assets;
- the mortgage serviceability buffer will be kept at 3%; and
- lending limits have not been applied.
Financial risk elevated
The regulator said in reaching a decision to retain its current settings, it took into account an uncertain interest rate and economic outlook, with high levels of household debt and inflation still above the Reserve Bank of Australia’s target range, as well as ongoing geopolitical instability.
Balancing these risks, APRA noted that the quality of new housing lending remained sound, and while arrears rates on mortgage and business lending portfolios continued to rise slowly, they remained below Covid peaks.
APRA chair John Lonsdale (pictured above) said APRA was concerned that the level of overall risk to the financial system remained elevated.
“Our macroprudential policy settings play an important role in guarding against risks to the financial soundness of banks that could, in turn, undermine the stability of the Australian financial system,” Lonsdale said.
“Looking across the economy, we can see that credit growth for home purchases has moderated from its heights during the pandemic and is now a little below its long-term average.
Lonsdale said high debt-to-income and high loan-to-valuation ratio lending made up only small proportions of new lending. Lending standards remained sound with banks able to make exceptions to their serviceability policy when it was prudent to do so.
“Business credit is growing above historical averages, however commercial property prices continue to fall, driven by office and retail sector weakness.
While the level of non-performing loans across both residential and commercial portfolios remains relatively low, it is slowly trending upwards, said Lonsdale.
“Given the uncertain economic and interest rate outlook, including the possibility of higher cost-of-living pressures, it is important that prudent buffers are incorporated in serviceability assessments.
“APRA will continue to monitor closely bank lending standards and the broader operating environment and should we believe a change in macroprudential settings is necessary, we will make the appropriate adjustments where needed.”
Reaction to APRA decision
APRA’s decision to stick with the 3% loan buffer has been criticised by some in the industry who have called for the buffer to be lowered to take into account rising interest rates, while others want banks to ease the requirements that make it hard for some borrowers to qualify for their 1% dollar-for-dollar refinances.
Reacting to APRA's announcement via Linkedin, ANZ head of group funding Scott Gifford said the decision meant more first home buyers would be locked out of the market by retaining a 300bps serviceability buffer at or near the top of the rates cycle, whilst other central banks were easing.
“Keep in mind the 300bps was put in place during a period of ultra-low interest rates arising from extreme policy easing policies during the Covid period,” Gifford said. “More normalised interest rate buffers for Australia are in the context of 200 to 250bps.”
In reponse to Gifford's post, George Nassios, treasurer at Metrics Business Finance, which provides lending to SMEs and small commercial property projects, said new rospective homeowners were being benchmarked against an interest rate of 7.35% (not the cash rate of 4.35%).
“This linear policy is quite restrictive and causing a greater slowdown for prospective homeowners than the general public,” Nassios said.
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