APRA open to changing banking rules for home loans

If economy worsens, it would act to maintain credit flow

APRA open to changing banking rules for home loans


By Jayden Fennell

The chair of APRA has revealed he is open to changing bank rules on home loans if the Australian economy deteriorates, ensuring banks do not “choke off” credit and upset home prices further.

Australian Prudential Regulation Authority chairman John Lonsdale (pictured above) told the Australian Financial Review on Tuesday he was confident that banks had sufficient capital buffers to withstand falls in house prices, as economists predict house prices could fall 20% from their peak amid rising interest rates.

“We watch housing very, very closely, as it affects the banks we regulate and it is very important in the Australian economy,” Lonsdale told the AFR. “[This year] will be challenging. But we have done a lot of work over a long period of time to make sure the banks and the system is safe and stable and we have a safe and stable financial system.”

Economists are predicting another increase in the official cash rate when the RBA board meets on February 7, with another lift in March, before pausing ahead of a possible final rate increase by mid-year. Two more hikes could push the current 3.1% cash rise to 3.85%, a level not reached since 2012.

Meanwhile, capital city house prices are expected to fall over the first half of this year, after recording an 8.4% decline in 2022 according to CoreLogic.

Lonsdale said capital levels built up by the banks since the financial system inquiry and the ongoing focus on lending standards would allow banks to cope with a fall of this magnitude.

“We have built a very strong capital framework that provides a lot of buffer in the system. At the heart of it is the ‘unquestionably strong’ reforms, which we are embedding,” he said.

“Second is pursuing very sound lending standards and we have been doing that for a few years. If you look at prudential metrics right now, they look very good. We have strong capital, strong liquidity and credit standards are very good, so we sail into 2023 in a good position from a system point of view and entity point of view.”

Serviceability an ongoing concern

Lonsdale told the AFR he was comfortable with current controls on bank lending for housing, but if the economy deteriorated, he would be open to changing the macroprudential policies to ensure banks did not “choke off credit”, which could exacerbate house price falls.

APRA’s macroprudential settings – including the “serviceability buffer”, require banks to assess new loans at a rate 3% higher than the current market rates.

Lonsdale said the regulator would consider readjusting its rules to respond to lower credit growth or house prices, which would ensure credit continued to flow in the face of more aggressive official rate rises to reduce inflation and billions of dollars of fixed-rate mortgages reverting to much higher variable rates.

“We think the macroprudential settings – including the serviceability buffer, which is just one of them – are appropriate,” he said. “But if the facts change, our views might change too.”

In mid-2019, APRA lifted its serviceability buffer (which banks apply to ensure customers can cope with future rate rises) from 2% to 2.5% and then to 3% in October 2021. The RBA has raised rates by exactly this amount since May.

In its report, Lonsdale told the AFR that the markets now expect that following a few more cash rate rises, the Reserve Bank could start easing rates early in 2024, while any reconsideration of the serviceability buffer would show APRA was also preparing for rates to peak.

“It is very much a trade-off as their main focus is protecting bank depositors by ensuring lending standards are strong,” he said.

“We knew things were going to become more difficult [when we increased the buffer in 2021]. But at the same time, we have got to balance not choking off credit – there is a difficult balance there that needs to be struck.”

Credit growth under microscope

APRA’s latest set of property exposure statistics found the serviceability buffer fell below 3% in Q2 and Q3 2022, the AFR reported. The statistics showed the implied buffer was 2.7% in Q3, down from 2.9% in Q2 (these numbers do not include fixed rate loans).

“Going forward we will look closely at credit growth, asset prices – whether housing or other asset prices and we always look closely at lending standards,” Lonsdale said. “They are the kind of key indicators that we will look at during 2023 to see whether there are any changes necessary.”

Lonsdale said with a slowing economy and housing prices falling, there would be stresses.

“But the system is strong, it is resilient and can stand up to stresses. We stress test the banks: they remain sound even under stringent stress testing,” he said.

“There will be some people who suffer stress and that is very unfortunate. But what we are saying to the banks is they need to get onto this early. They know which customers are likely to be affected and if you have more time, you can get a better outcome.”

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