APRA to hone in on residential lending

by Miklos Bolza06 Apr 2017
The Australian Prudential Regulation Authority (APRA) will continue to refine its response to rising levels of residential lending and corresponding capital risk factors as it further aims to make the national banking system ‘unquestionably strong’.

In a speech at the Australian Financial Review’s Banking & Wealth Summit in Sydney yesterday (5 April), APRA chairman Wayne Byres told the audience how the regulator would act moving forwards.

“Probably the biggest issue we will need to resolve in ensuring capital is appropriately allocated is whether and how we adjust the risk weights for housing-related exposures.”

While last week’s prudential measures to further strengthen residential mortgage lending practice was a “tactical response” to conditions in the housing market, Byres said that a longer term and more strategic response was needed.

This response will include an additional review of the relative and absolute capital requirements for housing exposures.

“That should not be taken to imply that there will be a dramatic increase in capital requirements for housing lending: APRA has always imposed capital requirements for housing exposures that are well above international minimum standards, so we do not start with glaring deficiencies.”

However, he highlighted the “notable concentration” in housing found in the Australian banking system – an issue that the regulator to definitely pay attention to.

The increased concentration in mortgage lending by the banks implies the system has de-risked rather than de-leveraged, Byres said.

“But that assessment is itself premised on a critical assumption:  that a high and increasing concentration in mortgages is generating a lower risk banking system. In the current environment, it is certainly an assumption that deserves a bit more scrutiny.”

APRA plans on releasing an information paper around the middle of the year which explains how the banking system is viewed through a variety of lenses:
  • Relative measures: ensuring Australian banks remain in the top quartile of international peers as recommended by the Financial System Inquiry
  • Alternative measures: making sure banks are seen positively by various national and international ratings agencies
  • Absolute measures: establishing whether banks can withstand extreme but plausible adversity
The paper will also go over the extent of any further strengthening required as well as the timeframe over which these measures can be achieved.

“Beyond establishing the aggregate level of capital, we will need to follow that up with consultation on how the regulatory framework should allocate that capital across the different types of risk exposure,” he said.

Changes will include greater limitations on the use of internal credit risk models and the removal of operational risk models – both of which will primarily impact the larger banks.

Related stories:

RBA refocuses on need for strong lending standards

APRA mandates 30% limit on interest only resi lending

Tighter lending restrictions could backfire