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APRA’s home loan buffers deemed ‘appropriate’ amid increased volatility

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The regulator has published an assessment of its macroprudential policy settings.

The Australian Prudential Regulation Authority (APRA) has determined that existing macroprudential policy settings remain “appropriate” in the current risk environment.

The current operative settings are a 1.0 per cent neutral level for the countercyclical capital buffer (CCyB) and a 3.0 per cent loan serviceability buffer above the loan rate.

According to APRA chair John Lonsdale, these settings are considered to be appropriate given the potential for domestic and global economic conditions to deteriorate.

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“APRA closely monitors financial risks, and we see a high degree of uncertainty in the broader outlook, globally and domestically,” he explained.

“On the one hand, there are signs of a deterioration in conditions, including falling asset prices and the potential for pockets of stress. On the other hand, lending standards are broadly sound, loan arrears remain low and the banking system is well capitalised. 

“On that basis, we believe our current macroprudential policy settings remain appropriate. In particular, APRA’s view is that the 3 per cent level remains prudent given the potential for further interest rate rises, high inflation and risks in the labour market.”

APRA said that macroprudential policy is an important feature in its regulatory toolkit and involves policy measures aimed at promoting stability at a systemic level. 

In a new information paper aimed at providing greater transparency on macroprudential policy, the regulator noted that it had instituted a neutral rate of 1.0 per cent of risk weighted assets (RWA) for the CCyB as part of recent reforms to bank capital standards.

“The CCyB is a buffer that can be relaxed if needed by APRA in a downturn, to provide banks with flexibility to absorb rather than amplify the impact of systemic shocks,” APRA said.

“Key indicators of stress suggest that economic conditions are not at a point where this would be required, and credit growth remains positive.”

Regarding the serviceability buffer, APRA noted that this had been increased from 2.5 per cent to 3.0 per cent in late 2021 amid “heightened risks” for the financial system.

“While lending at high debt-to-income ratios has reduced, a key concern at the time, heightened risks to serviceability remain: there is the potential for further interest rate rises, high inflation and risks in the labour market,” the regulator explained.

“It is important that all banks maintain prudent lending in the current environment of competitive pressure on standards.”

However, Mr Lonsdale also noted that these settings are not considered to be set in stone.

“The events of recent years have emphasised that conditions can change rapidly. We continue to closely monitor the outlook for credit growth, asset prices, lending conditions and financial resilience,” he said.

“Should risks to financial stability change, APRA will adjust its macroprudential policy settings accordingly after careful consideration and consultation with other agencies on the Council of Financial Regulators.”

APRA’s home loan buffers deemed ‘appropriate’ amid increased volatility

The regulator has published an assessment of its macroprudential policy settings.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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