APRA Papers Examine Measures on CCyB and Mortgage Lending Standards
APRA published information papers on the indicators that contributed to the countercyclical capital buffer (CCyB) decision and on the review of the prudential measures for residential mortgage lending risks. APRA also announced its decision to keep the CCyB for authorized deposit-taking institutions on hold at zero percent. APRA reviews the buffer quarterly and it has been set at zero percent of risk-weighted assets since it was introduced in 2016.
In the annual information paper on CCyB, APRA outlined the core economic indicators that contributed to the decision, including the following:
- Moderate growth in housing and business credit over 2018
- A decline in higher-risk categories of new housing lending, including interest-only loans, investor loans, and lending at high loan-to-value ratio (LVR) levels
- Continued strengthening in authorized deposit-taking institutions’ capital positions as they move to implement the requirements of “unquestionably strong” capital ratios
Also influencing APRA’s judgment that a zero percent CCyB setting remained appropriate has been the impact of measures that APRA has taken since 2014 to address systemic risks related to residential mortgage lending standards. In a separate but related information paper, APRA detailed the objectives for its interventions in the residential mortgage lending market in recent years, which were aimed at reinforcing sound mortgage lending standards and increasing the resilience of the banking sector in the face of heightened risks. The following are the key findings in the paper:
- Authorized deposit-taking institutions have lifted the quality of their lending standards, with improvements in policies and practices across the industry.
- During the period in which the adjustments were occurring (2015-2018), the growth in total credit for housing was stable.
- The composition of credit for housing, however, changed notably: the rate of growth of lending to investors fell considerably and the proportion of loans written on an interest only basis roughly halved (although, given the high starting point, one in five loans is still made on an interest-only basis).
- Although APRA did not introduce measures to specifically target lending with high LVR, there has been a moderation in high LVR lending in recent years.
- Initially, authorized deposit-taking institutions sought to adjust lending practices without resorting to interest rate increases. Ultimately, however, interest rates were used to help manage demand for credit. The pricing differential that has emerged between owner-occupied and investor loans, and between amortizing and interest-only loans, is often seen to be a product of the APRA benchmarks, but is also reflective of changes to capital requirements that will likely see differential pricing for higher risk lending continue into the future.
In conjunction with the other agencies on the Council of Financial Regulators, APRA will continue to closely monitor economic conditions and will adjust the CCyB if future circumstances warrant it. Separately, APRA is also considering setting the buffer at a non-zero default rate as part of its ongoing review of the authorized deposit-taking institutions capital framework.
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Keywords: Asia Pacific, Australia, Banking, CCyB, Residential Mortgage Lending, Systemic Risk, LVR, APRA
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