APRA to outline macroprudential controls

In response to industry feedback on policy consultations and in light of COVID-19, APRA has realigned its priorities for the rest of the year.

A number of policy releases originally scheduled for 2021 have been bumped to 2022, including standards for interest rate risk in the banking book, operational resilience, remuneration disclosure requirements and offshore reinsurance.

What APRA has said will come in the fourth quarter, includes plans to release an information paper setting out the its framework for the use of macroprudential policy tools.

APRA has been working with the Reserve Bank of Australia (RBA) to monitor the housing and lending markets, having discussed what tools they would be prepared to use, should they need to intervene.

RBA governor Philip Lowe previously pointed to example measures such as raising the minimum interest rate banks use for home loans, or limits on high loan-to-value ratio (LVR) or high debt-to-income lending in banks’ portfolios.

APRA recorded a rise in high debt-to-income lending during the June quarter, with its chair Wayne Byres expressing concern. However, the watchdog decided to not yet pursue any action, as other risk metrics decreased.

Last week, the Reserve Bank sounded the alarm on surging house prices and rising debt levels, warning they could lead to cracks forming in Australia’s financial stability.

But RBA assistant governor (financial system) Michele Bullock confirmed the regulators are yet to see any deterioration in lending standards.

Meanwhile, the big four bosses have all conveyed their views on the market and potential intervention.

ANZ chief executive Shayne Elliott and CBA CEO Matt Comyn have both recently said the banks shouldn’t wait for regulators to set standards and that they should be proactive in tightening their lending.

While ANZ is reportedly conducting more strenuous checks on loan applications, CBA raised its benchmark serviceability floor rate in June, to 5.25 per cent.

Mr Comyn suggested changing the floor rate would be the better control over limits to high LVR lending, as the latter could disproportionately affect cohorts of borrowers such as first home buyers.

In contrast, NAB and Westpac bosses Ross McEwan and Peter King previously had told a parliamentary committee that while they were concerned housing affordability was stretched, the regulators should wait out the spring sale season, a traditionally busy period for real estate.

“Hopefully with opening up from COVID, I would give it another two to three months before we started making changes,” Mr McEwan said.

APRA priorities

Meanwhile, APRA’s main priorities for the December quarter are:

• Completing bank capital reforms, with three final standards for capital adequacy to be released in November 2021 and to apply from January 2023
• Consulting on new standards for financial contingency and resolution, to be released in November for an extended consultation
• Updating superannuation standards for insurance in super and investment governance, ahead of a more comprehensive review of other key standards next year, with APRA targeting a sharper focus on the best financial interests duty
• Consulting on reforms to the insurance capital framework

APRA also has plans to release final guidance on managing the financial risks of climate change.

The regulator will provide a full update on the policy agenda for 2022-23 early next year.

[Related: Surging house prices drive record household wealth]