RBA hoses macroprudential

ScreenHunter_1923 Apr. 03 11.00

By Leith van Onselen

The Reserve Bank of Australia (RBA) yesterday posted its submission to the Government’s Financial System Inquiry, which as expected denied the need for Australia to implement macroprudential controls on high risk mortgage lending:

In carrying out its duties as Australia’s integrated supervisor of financial institutions, it should be remembered that APRA already takes an industry-wide, or systemic, perspective, as is consistent with its financial stability mandate. APRA makes its systemic mandate operational through a number of elements of its supervisory practice. This point is sometimes not recognised by those advocating a separate macroprudential mandate. For example, APRA’s risk-based approach subjects institutions that pose greater systemic risks to more intensive supervision, and potentially higher capital or other prudential requirements. In this context, and as noted earlier, APRA has released its D-SIB framework, identifying the four major banks as D-SIBs and requiring them to hold additional capital from January 2016. Further, APRA has, at times, imposed prudential measures in response to the build-up of risk in particular sectors. For example, following its stress testing of the housing loan portfolios of ADIs in 2003, APRA made significant adjustments to the risk-weighting of housing loans as well as adjustments to the capital regime for lenders mortgage insurers (LMIs). Such a response to systemic or industry-wide – essentially macroprudential – concerns reflects a broader perspective than a narrow focus on a particular aspect of lending standards such as the LVR…

Other jurisdictions have adopted different approaches to interagency coordination in recent years, and in a number of instances have moved in the direction of greater formalisation of coordination arrangements (Section However, the potential benefits of such approaches should not be overstated and these arrangements are too new in many (advanced) jurisdictions to judge their effectiveness. Adopting such an approach in Australia by formalising the CFR with explicit responsibilities and policy tools would involve transferring agency constituent powers to the CFR, with the risk of blurring lines of responsibility that to date have worked well. In a number of countries the approach has been to create separate macroprudential and microprudential regulatory bodies. The Bank, along with APRA, is not convinced of the merits of such a division between macroprudential and microprudential policy. The RBA and APRA ‘view macroprudential policy as subsumed within the broader and more comprehensive financial stability policy framework’ (2012 p.1). If the financial stability framework is effective and there is strong interagency cooperation and coordination, separate governance arrangements for macroprudential policy are not necessary. More generally, most macroprudential tools being discussed are essentially normal prudential tools used for macroprudential purposes, which also means a clear distinction between macro- and microprudential policy could be difficult to maintain in practice.

There’s a few things worth pointing out, which contradict the RBA’s claims.

First, in August 2012, the RBA released a paper entitled Taming the Real Estate Beast: The Effects of Monetary and Macroprudential Policies on Housing Prices and Credit, which argued that macroprudential tools have been effective in mitigating housing boom and bust cycles.

The paper examined macroprudential policy actions by in 57 economies taken over the past 30 years, and combined this data with time series on housing prices, rent, housing credit and interest rates gives to provide a detailed picture of the key macroeconomic, institutional, monetary, and regulatory factors affecting housing markets globally.

According to the paper (my emphasis):

The results establish a link between interest rates and macroprudential policy actions and subsequent fluctuations in real housing prices and real housing credit. Higher short-term interest rates tend to slow housing price appreciation and housing credit growth, although the magnitude of the effect is modest. Actions categorised as prudential measures (maximum LTV and DSTI ratios, provisioning requirements, real estate exposure limits and risk weights) are consistently jointly significant in our regressions. Decreases in the maximum LTV ratio are associated with reductions in the growth rate of housing prices. Similarly, reductions in the maximum DSTI ratio and increases in provisioning requirements are associated with reductions in the growth rate of real housing credit. We were unable to find any consistent relationship between changes in non-interest rate monetary policy measures and either housing price or credit growth, however. Taken together, our results suggest that certain types of macroprudential policies can be effective tools for stabilising housing price and credit cycles. This is good news for central banks seeking additional flexibility in their pursuit of macroeconomic and financial stability objective.

Second, the claim that APRA is increasing the capital requirement on the Big Four D-SIBs from 2016 is spurious, as shown by Deep T earlier this year. The truth is there is to be no material change in the actual capital requirements of Big Four.

Third, the claim that “APRA made significant adjustments to the risk-weighting of housing loans” in 2003 in response to stress testing is amusing when one considers that the average risk-weight on residential mortgages held by the Big Four is just 16%, implying an average capital charge on mortgages of only 1.28% (8% times 16%). Even adding the LMIs, bugger all multiplied by very little is still bugger all.

Big dumb rules like macroprudential tools might seem clumsy but they beat regulatory hubris.

[email protected]


Leith van Onselen
Latest posts by Leith van Onselen (see all)


  1. But but but, RBA guys have nation’s best interest in their hearts, don’t they? So they must know what they are doing!


  2. Clearly APRA’s tools are not adequate. If they were we wouldn’t be having this debate, and the RBA wouldn’t have removed the easing bias from its statements.

  3. MP has failed in NZ. They could have achieved the same effect by banning first home buyers because that’s what MP has effectively done. Investors have larger deposits and therefore are unlikely to be impacted by MP.

    See last night’s segment on The Business

    Supply is the primary issue, demand side fixes is just picking who gets to buy and who doesn’t.

  4. As I’ve written about on numerous occasions and UE points out above, its clear in the numbers that the problem is APRA’s microprudential supervision. The RBA has been conned by APRA and a lack of proper analysis of APRA’s supervision of Mega Bank.

    Is this a bureaucratic rule to not analyse or criticize another government dept? Or as the UK has found out separating supervision away from the central bank leads only to disaster?

    • mine-otour in a china shop

      For once I dont agree with you here Deep T on the conning issue (not on the microprudential supervision point).

      I don’t think the RBA have been conned by APRA – they have outsourced the supervision job to them and trust them implicitly with their systems and analysis. They are regularly updated but rarely challenge any thinking or analysis which shows they are comfortable with APRA thinking which suits their positive spin agenda.

      On the APRA side the challenge is to gather historical data which shows stability and points back in time, rather than complete innovative analysis, which looks forward and then develop thinking and risk assessments from that. Again the RBA is fine with this approach as it allows everyone to get a big pat on the back. APRA no longer has a research department and it doesnt like transparency due to the commerical sensitivity of banks!

      At ground level there are huge concerns, but at Senior Management level they know that the game is to back each other, talk confidence, dont challenge the thinking, ignore international evidence and give yourself a big pat on the back. That is how you progress your careers in these places.

      When it all goes wrong though the RBA will blame APRA and we will bring in ADI supervision once more to the RBA.

      • Mine-otour, You’ve convinced me, you’ve nailed it!

        It does guarantee that the house will fall. Knowing that allows one to concentrate solely on the timing

  5. This point is sometimes not recognised by those advocating a separate macroprudential mandate.

    I can’t recall anyone in the business media other than macrobusiness advocating Macroprudential mandate.

    So.. Hello Luci.. 🙂 and congrats to macrobusiness for keeping up the moral pressure on the RBA. The RBA can longer claim that nobody advocated for MP and nobody could have forseen the impact of not implementing MP.

    • Poor Luci might need a new prescription for her spectacles.

      All that scanning of creeks and ponds across the nation and not a single platypus ripple to be seen.

      Perhaps platypus electroreception has evolved to detect RBA standard issue binoculars and they all dive to the bottom of the harbours when she is trudging along the banks.


      • A whole flred of platypuses are regularly sighted on MB blog.. But Luci lurking in the MB comments section does not want to spot them 🙂

      • Ah Luci, we’ll never forget your praising of the innovative mortgage financing schemes in the US prior to the GFC.