‘The sources of risk are different this time’: APRA

The prudential regulator has spoken out about macroprudential tools for the first time since the RBA raised the issue in its Financial Stability Review last month.

Speaking at the Senate Standing Committee on Economics hearing in Canberra this week, APRA chairman Wayne Byres said the regulator was counselling “the more aggressive lenders”.

“Responding to potential risks in the housing market in this way is not new,” Mr Byres said. “We see it as standard supervision,” he said.

“In the period from 2002 to 2004, for example, there was a similarly strong run-up in house prices, and similar concerns about higher risk lending and emerging imbalances.

“We’re doing now what we did then: collecting additional information, counselling the more aggressive lenders, and seeking assurances from boards of our lenders that they are actively monitoring lending standards.”

While APRA is yet to reach a decision on what further action may be taken to rein in risky lending, Mr Byres says the regulator generally seeks to avoid outright prohibitions on activities where possible.

“Instead, our regulatory philosophy is to focus on institutions’ setting their own appetite for risk,” he said.

“We also use the regulatory capital framework to create incentives for prudent lending and ensure that, while institutions remain free to decide their lending parameters, those undertaking higher risk activities do so with commensurately higher capital requirements.

“That is not to say that we would never use the sorts of tools being employed elsewhere, but they are unlikely to be the first ones we reach for.”

The regulator is finalising guidance on sound mortgage lending practice and has conducted a comprehensive stress test of the largest lenders.

“The sources of risk are different this time around – last time we were focused on low-doc and no-doc lending – but the response of higher supervisory intensity and regulatory requirements in the face of higher risk activity is not new,” Mr Bryes said. “It is APRA doing its job.”

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