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APRA defends credit curbs, acknowledges ‘trade-offs’

Macro-prudential measures imposed to address “systemic risks” in the mortgage market had no “undue” impact on the flow of credit, APRA has said.

The Australian Prudential Regulation Authority (APRA) has released an information paper outlining its assessment of the effect of its macro-prudential measures on residential mortgage risks.

The prudential regulator has outlined its rationale for its interventions in the residential mortgage market, which it said were aimed at “reinforcing sound mortgage lending standards” and “increasing the resilience of the banking sector in the face of heightened risks”.

“These risks included an environment of rising household debt, subdued wage growth, rising house prices, and an erosion of bank lending standards at a time of historically low interest rates,” APRA stated in its report.

Among APRA’s prudential measures were a 10 per cent cap on investor mortgage growth in 2014, a 30 per cent cap on interest-only lending in 2017, and prudential guidance on “better mortgage lending practices”.


The regulator has since removed both of its caps, claiming that they have “served their purpose”.

APRA has claimed that as a result of its measures:

  • authorised deposit-taking institutions (ADIs) have lifted the quality of their lending standards, with improvements in policies and practices across the industry;
  • the growth in total housing credit stabilised;
  • the rate of growth of lending to investors fell considerably, and the proportion of loans written on an interest-only basis roughly halved;
  • there has been an indirect moderation in high LVR lending in recent years.

However, APRA acknowledged that its attempt to reduce risk came with some “trade-offs”, stating that the shift to “improved and more consistent industry-wide lending standards” involved some “uncertainty and disruption” for borrowers, lenders and third parties.

“These operational impacts on the mortgage lending sector were significant, due to the extent of deterioration in lending standards that had previously occurred, inconsistencies in practices across the industry, and the often poor quality of data maintained by ADIs on their mortgage portfolio,” the regulator noted.

APRA also made reference to pricing changes from lenders off the back of its measures, designed to manage volumes of higher risk loans in line with APRA’s expectations.

The regulator responded to the Australian Competition and Consumer Commission mortgage pricing report, downplaying the assertion by the competition watchdog that lenders used APRA’s caps as an opportunity to engaged in “synchronised” pricing behaviour in order to generate revenue to offset regulatory costs.

“[Given] the other factors at play, such as the potential for higher capital requirements for these types of lending (which would apply to the entire portfolio), it is difficult to disentangle the effects of the imposition of the benchmarks with other drivers,” APRA stated.

Further, APRA acknowledged that its prudential measures revealed a number of system and data deficiencies within ADIs that “constrained their ability to adjust their practices”, which made it difficult for smaller ADIs to “manage quantitative-based constraints”.

However, the regulator claimed that despite such constraints, small ADIs “increased their market share slightly”.

Following the release of the information paper, APRA chairman Wayne Byres said that, on the whole, APRA was satisfied with the outcome of its prudential measures.

“APRA’s assessment is that, collectively, its interventions achieved the necessary objective of strengthening lending standards and reducing a build-up of systemic risk in residential mortgage lending,” Mr Byres said.

“The review provides some valuable insights on the impact of the measures, which have necessarily involved some trade-offs and judgement in the process of strengthening the resilience of the banking sector.”

The APRA chairman concluded: “Importantly, while the temporary lending benchmarks are being removed, the changes we have made to lift lending standards are designed to be permanent, continuing to support the resilience of the banking system and, ultimately, the protection of bank deposits.”

[Related: APRA scraps interest-only cap]

APRA defends credit curbs, acknowledges ‘trade-offs’

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