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APRA says 3% loan buffer is still ‘appropriate’

The 3.0 per cent loan serviceability buffer and existing macroprudential policy settings are “appropriate”, APRA has concluded in an assessment of its policy settings.

The Australian Prudential Regulation Authority (APRA) has confirmed that its macroprudential policy toolkit remains “appropriate” even as domestic and global economic conditions deteriorate.

The assessment, which included reviewing the 1.0 per cent neutral level for the countercyclical capital buffer and 3.0 per cent loan serviceability buffer, did not put forward any immediate changes to the operative settings but suggested they may be tweaked in future if necessary.

The loan serviceability measures were changed in 2021, when the cash rate was still at its emergency pandemic settings of 0.10 per cent and record numbers of Australians were buying property with mortgages. In October 2021, APRA raised the loan buffer, telling banks it expected them to assess borrowers with a buffer of 3.0 per cent (up from 2.5 per cent).


However, as inflation has continued to rise and the RBA has hiked the cash rate from 0.10 per cent to 3.35 per cent in that time, APRA has been reviewing its settings.

Key indicators of stress suggest that economic conditions are “not at a point where this would be required, and credit growth remains positive”, the regulator outlined.

In summary, the regulator said there was therefore no strong case to tighten or relax macroprudential policy measures”.

The lending landscape is changing

In the assessment, APRA highlighted that the current set of indicators presents a mixed picture.

While credit growth is slowing from recent peaks, it remains relatively strong.

APRA flagged that total system credit growth was 8 per cent in the year to December 2022, down from a high of 9 per cent in 2021 (but still above the post-global financial crisis average of 5 per cent). Leading indicators, such as the level of new loan approvals, also suggest that credit growth may slow further.

Similarly, while house prices have fallen (down by about 8 per cent since their 2022 peak but more than 18 per cent up on 2019 figures), overall household debt-to-income remains high at around 190 per cent.

However, lending at high debt-to-income (DTI) ratios has declined over the past year. In the September quarter 2022, the share of lending at high DTIs (six or more) was 17 per cent, compared to 23 per cent a year earlier.

The aggregate indebtedness of the household sector has risen over recent years. Australian household debt is high by both historical and international standards. A highly indebted household sector can be less resilient to future shocks, such as from rising interest rates, higher living expenses or a reduction in income. This requires ongoing prudence in lending standards, the report read.

“APRA has also maintained the serviceability buffer at 3.0 per cent above the loan rate. This buffer was increased to this level in late 2021, in an environment of heightened risks for the financial system. 

“While lending at high debt-to-income ratios has reduced, a key concern at the time, heightened risks to serviceability remain: there is the potential for further interest rate rises, high inflation and risks in the labour market. It is important that all banks maintain prudent lending in the current environment of competitive pressure on standards.”

The regulator also assessed the impact of the ‘fixed rate cliff’, given that around a third of mortgages were for fixed-rate loans at the end of 2022 and around half of these borrowers on fixed rate terms will transition off their current arrangements by the end of 2023. As such, APRA said it is engaging with banks to ensure that they are proactively managing this risk

Arrears are also a key area of focus for financial risk, but APRA said that despite arrears ticking up recently, the level of non-performing loans is still less than 1 per cent of total credit exposures and loans that are 30 days past due are not yet reflecting signs of systemic stress.

‘Our current macroprudential policy settings remain appropriate’, APRA chair

APRA chair John Lonsdale commented: “APRA closely monitors financial risks, and we see a high degree of uncertainty in the broader outlook, globally and domestically. On the one hand, there are signs of a deterioration in conditions, including falling asset prices and the potential for pockets of stress. On the other hand, lending standards are broadly sound, loan arrears remain low and the banking system is well capitalised. 

“On that basis, we believe our current macroprudential policy settings remain appropriate. In particular APRA’s view is that the 3 per cent level remains prudent given the potential for further interest rate rises, high inflation and risks in the labour market. 

“These settings, however, are not set in stone. The events of recent years have emphasised that conditions can change rapidly. We continue to closely monitor the outlook for credit growth, asset prices, lending conditions and financial resilience. 

“Should risks to financial stability change, APRA will adjust its macroprudential policy settings accordingly after careful consideration and consultation with other agencies on the Council of Financial Regulators.”

APRA’s assessment was that there continues to be “no need to apply macroprudential policy measures to non-ADI lenders”.

[Related: Is the 3% buffer too high, given rising rates?]

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