In a letter to the authorized deposit taking institutions, the Australian Prudential Regulation Authority (APRA) announced an increase in the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications. APRA now expects that banks will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate. This compares to a buffer of 2.5 percentage points that is commonly used at present. In case institutions continue to approve loans using a lower buffer rate beyond the end of October 2021, APRA will adjust the individual prudential capital requirements to reflect higher credit risk inherent in new lending.
The APRA decision, which reflects growing financial stability risks from authorized deposit-taking institutions’ residential mortgage lending, is supported by other members of the Council of Financial Regulators (CFR), comprising the Reserve Bank of Australia (RBA), the Treasury, and the Australian Securities and Investments Commission (ASIC). In determining its course of action, APRA also consulted with the Australian Competition and Consumer Commission. The APRA Chair Wayne Byres said this is a targeted and judicious action designed to reinforce the stability of the financial system. Along with other members of the CFR, APRA will continue to closely monitor risks in residential mortgage lending and may take further steps, if necessary.
Under APG 223, the Prudential Practice Guide on residential mortgage lending, APRA expects that prudent authorized deposit-taking institutions would keep the level of the buffer under review to assess whether it remains appropriate in relation to the broader risk environment. Even with record low interest rates and increasing levels of lending at high multiples of borrower income, most authorized deposit-taking institutions have made no changes to their serviceability buffers and have let floor rates atrophy. APRA, therefore, also requests authorized deposit-taking institutions to review their risk appetites for lending at high debt-to-income ratios. While the use of a higher serviceability buffer will reduce risks for individual borrowers, growing portfolio concentrations of high debt-to-income loans also need to be monitored closely. Should concentrations of this lending continue to rise, APRA would consider the need for further macroprudential measures. If there is a further increase in key risk trends, APRA will consider additional measures.
In addition to the near-term measures, APRA is also taking steps to ensure that macro-prudential policy more broadly is placed on a sound longer-term footing. Later this year, APRA plans to publish an information paper outlining its framework for macro-prudential policy, which will cover all capital and credit options. This information paper will set out:
- the APRA approach to macro-prudential policy, including objectives, the full toolkit of options, and implementation
- how APRA would apply macro-prudential policy to non-authorized deposit taking institutions lenders, should circumstances warrant it
- a process of consultation on proposals to embed macro-prudential policy tools more clearly in the formal prudential requirements of APRA
Keywords: Asia Pacific, Australia, Banking, Regulatory Capital, Credit Risk, APG 223, Basel, Macro-Prudential Policy, RRE, APRA
The Prudential Regulation Authority (PRA) published the final policy statement PS21/21 on the leverage ratio framework in the UK. PS21/21, which sets out the final policy of both the Financial Policy Committee (FPC) and PRA
The Consumer Financial Protection Bureau (CFPB) proposed to amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) under Section 1071 of the Dodd-Frank Act.
The Prudential Regulation Authority (PRA) decided to maintain, at the 2019 levels, the buffer rates for the Other Systemically Important Institutions (O-SII) for another year, with no new rates to be set until December 2023.
The Financial Stability Board (FSB) published a progress report on implementation of its high-level recommendations for the regulation, supervision, and oversight of global stablecoin arrangements.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) are consulting on the preliminary guidance that clarifies that stablecoin arrangements should observe international standards for payment, clearing, and settlement systems.
The European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) have set out their respective work priorities for 2022.
The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0, in addition to the reporting module on leverage under the common reporting (COREP) framework.
The European Commission (EC) published the Implementing Decision 2021/1753 on the equivalence of supervisory and regulatory requirements of certain third countries and territories for the purposes of the treatment of exposures, in accordance with the Capital Requirements Regulation or CRR (575/2013).
EC published the Implementing Regulation 2021/1751, which lays down implementing technical standards on uniform formats and templates for notification of determination of the impracticability of including contractual recognition of write-down and conversion powers.
The Federal Deposit Insurance Corporation (FDIC) issued supplemental instructions for the Consolidated Reports of Condition and Income—that is, Call Reports FFIEC 031, FFIEC 041, and FFIEC 051—for the September 30, 2021 reporting date.