APRA announces update on macroprudential settings

The Australian Prudential Regulation Authority (APRA) will keep its macroprudential policy settings steady following its latest review of domestic and international financial conditions and risks.

APRA’s macroprudential policy tools are aimed at mitigating financial stability risks at a system-wide level to promote a safe and stable financial system that enables households and businesses to confidently borrow, save and invest for the future.

In deciding to keep its settings on hold, APRA took account of high levels of household debt and above-average total credit growth, which is expected to rise further as interest rates decline. Lower inflation and interest rates have eased financial pressures on borrowers, labour market conditions remain tight, bank lending standards remain sound and non-performing loans remain low. However, the risk of economic shocks from the uncertain geopolitical environment is elevated.

Taking into account these factors, APRA confirms that:

• the mortgage serviceability buffer will remain at 3 percentage points; and
• the countercyclical capital buffer stays at its default level of 1 per cent of risk-weighted assets.

Chair John Lonsdale noted that the current level of the buffer has not been restrictive on new credit to the household sector.

“Over recent months, we have seen credit continuing to flow to different borrower segments, including to first-home buyers. Declines in inflation and interest rates have eased financial pressures on borrowers and increased borrowing capacity for new borrowers, and lending standards remain sound.

“Looking ahead, however, should interest rates fall significantly further while labour markets remain robust, that has historically led to higher credit growth and leverage, higher house prices and often more risky lending, such as high debt-to-income and investor lending.

“The potential for a recurrence of these trends is something both APRA and the Council of Financial Regulators are carefully monitoring. High household debt is a key vulnerability in our financial system, which has more exposure to residential mortgages than any comparable country.

“Although lending standards are currently sound, it’s important to be forward-looking and prepared for potential risks at future points in the financial cycle. In 2022, APRA updated its prudential standard on credit risk¹ to require banks to be pre-positioned to implement a range of credit-based macroprudential measures, if needed, to address risks to financial stability.

“To ensure such tools can be activated in a timely manner if needed, we will shortly begin engaging with regulated entities on implementation aspects of different macroprudential tools to manage lending risks. As well as the serviceability buffer, these tools include limits on new high debt-to-income lending, or limits on new investor or interest-only loans,” Mr Lonsdale said.

Footnote

¹Letter to ADIs - Macroprudential Policy credit measures