A Reserve Bank head honcho has indicated there will be no caps put in place to rein in riskier lending anytime soon.
The bank’s head of financial stability Dr Luci Ellis spoke at the University of Adelaide on Wednesday night about why the current system is working for Australia, and why there do not need to be any macroprudential tools put in place to curb the housing market.
She talked about the downside of lending restrictions – which can limit access to credit for some borrowers.
The Reserve Bank must seek to reduce the build-up of risk, said Ellis, and also make the system resilient to the shocks that occur from time to time, so that the system does not end up in crisis following every unexpected event.
“It becomes clear that rapid developments in property markets, other asset prices and credit can be – but are not always – a signal that risks to financial stability are building.”
But implementing macroprudential measures – such as the Reserve Bank of New Zealand has done to limit high LVR lending – is not neccesarily the answer to curb a potentially harmful credit boom, Ellis said.
“By now it should be clear that the Australian authorities' views on this supposedly new toolkit are a bit different from those in some other jurisdictions. We view macroprudential policy as something to be subsumed into the broader financial stability framework.
“We recognise that quantitative restrictions were already tried in the 1960s and 1970s – and didn't always work so well. And we think that it is entirely acceptable for prudential measures, macro or otherwise, to be wielded by the prudential supervisor, where they have the appropriately formulated mandate.”
Overseas bodies, including the International Monetary Fund, have argued for greater use of such tools to prevent banks from inflating housing bubbles.
But Ellis said by implementing macroprudential tools, it is implying that banking supervisors cannot be relied on to discharge their duties with system-level concerns in mind – which is not the case in Australia.
“In Australia, the authorities consider macroprudential policy to be better described as a state of mind than a suite of tools.”
Ellis alluded to APRA’s recently released draft prudential practice guide on mortgage lending, and said instead of setting out prescriptive rules, the regulator’s approach has been to empower bank boards to demand prudent lending policies and practices at their banks.
However, this is not to say that some countercyclical tightening of prudential policy settings is never warranted, Ellis said.
“But if monetary policy responds appropriately to domestic conditions, and the prudential framework is sufficiently tight and there are no leakages through public sector involvement in absorbing credit risk, the set of circumstances in which a countercyclical prudential response to a credit boom is needed is much narrower.”
Slashed ASIC budget means less surveillance
Lack of first home buyers cyclical, says RBA head
Cash-back sweeteners curry favour only for short time, says CEO