Is APRA preparing self-help macroprudential?


We recently seen that Australian bank regulators are discussing the macroprudential policies that we need. From the RBA minutes:

Lending to housing investors had been increasing for some time in New South Wales, and over the past six months it had also picked up in some other states. While such a pick-up would be unhelpful if it was a result of lenders materially relaxing their lending standards, current evidence indicated that there was little sign of this occurring. Members noted that the recent momentum in households’ risk appetite and borrowing behaviour warranted close observation, but agreed that present conditions in the household sector did not pose a near-term risk to the financial system. Members discussed the experience in other countries where macroprudential tools had been utilised to slow demand for established housing and their possible application in Australia.

We also know that the tools under discussion are regulated servicing criteria. From a recent FOI request:

Other than avoiding an over-easing of monetary policy, the most promising policy response seems to be to introduce a regulatory regime that automatically requires larger interest buffers in loan affordability calculations when interest rates are low.  This could be introduced either as a prudential measure or as part of the National Consumer Credit Code, or both…

Good practice would suggest that the difference between actual and qualifying interest rates should increase when actual interest rates are unusually low…Liaison suggests that many, if not all, lenders do this, but there is a case for doing more to ensure that interest rate buffers are countercyclical to actual interest rates…

But today I’m a little unsettled by a paragraph in the Financial Stability Review:

“It is important for banks’ risk management that they are vigilant in maintaining prudent lending standards, given that a combination of historically low interest rates and rising housing prices could encourage speculative activity in the housing market and encourage marginal borrowers to increase debt. APRA’s forthcoming Prudential Practice Guide, which will outline its expectations for prudent housing lending practices, should assist banks in this regard.”

This, surely isn’t going to be where macroprudential tools ends up is it? In some toothless help yourself manual?

Say it isn’t so!

David Llewellyn-Smith
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  1. carlosthedwarf

    “given that a combination of historically low interest rates and rising housing prices could encourage speculative activity in the housing market and encourage marginal borrowers to increase debt”

    Does this indicate they think that it’s not encouraging thees things currently?

  2. v110.v112.v116

    The RBA, APRA, and Government are all playing hot potato on this issue. This looks like a measure to negate accountability while continuing the property ponzi.

    When it goes pop they can all point to the ‘self help’ guide and say “we never sat back and did nothing, we took prudent measures where they were needed”. Confusion and misdirection will follow amid all the finger pointing.

  3. mine-otour in a china shop

    Of course it is going there. APRA is a toothless beast which runs a mostly principles based regulatory framework, which is captured and is run at the direction of the big banks.

    Despite what has happened across the globe, it trusts its banks to do the right thing. It gets away with this by joining the RBA and others in the act of endless back-slapping self congratulation for financial stability over the last 20 years, despite the main reason for the stability being the lack of a regional crisis in Asia.

    Rather than direct action (such as MP tools) it prefers to cover all bases by issuing pointless warnings and guidelines at conferences, speeches and research papers, whilst restricting transparency and access to internal risk models and LMI stress tests.

    MP will sadly never happen under APRA’s watch unless there is a crises. Banks have APRA by the nuts, not the other way around.

    • I don’t think it is so much that they trust the banks but rather that they trust the government to force the public to save the banks.

      I expect they know just how crooked the banks are.

  4. I have devised a brilliant formula to use to set the interest rate buffer:

    Buffer = [(OCR + 72)/(OCR + 12)]

    Where OCR is the RBA’s overnight rate, expressed as an integer.

    So when the OCE rate drops to zero, the buffer will be 6%. When the OCR rate goes to 10%, the buffer is 3.5%.

    This shall be called the “Peachy financial stability ratio”.

  5. Strange Economics

    Considering there’s advertisements for 99% mortgages out there at the moment isnt credit at risk already (for some sub-prime mortgages)

  6. As Alan Greenspan proved, self regulation works and the North Atlantic financial crisis (RBA’s head-in-sand euphemism for GFC) never happened /sarc