It was only five weeks ago that Reserve Bank of Australia (RBA) governor, Glenn Stevens, labelled macro-prudential controls on high risk mortgage lending as “dreaded” and the “latest fad” in parliamentary testimony.
Since that time, the landscape has changed immensely. Not only has investor mortgage demand hit another all time high, led by unprecedented demand in both Sydney and Melbourne, fueling further fears of a housing bubble, but several notable figures have lent their support to macro-prudential controls, effectively urging the RBA and APRA to implement such measures.
Over the weekend, Treasurer Joe Hockey endorsed macro-prudential controls, provided they are “targeted” and “time-limited”, thereby providing the RBA/APRA with the necessary political cover to implement such rules.
Hockey’s tentative support seemingly came about after the International Monetary Fund (IMF) endorsed macro-prudential controls as “the first line of defense to address potential financial stability threats” as part of its communique to the G20 meeting held in Cairns over the weekend.
The IMF’s endorsement also follows US Federal Reserve chair, Janet Yellen’s, speech two months ago, where she argued that macro-prudential tools should play “the primary role” in ensuring financial stability.
It seems, therefore, that momentum for macro-prudential is unstoppable and Australia’s financial regulators will soon fall into line with world’s best practice and implement such controls.
So what would Australia’s version of macro-prudential look like? At this stage it appears that the RBA/APRA are unlikely to follow the Reserve Bank of New Zealand’s approach and implement loan-to-value ratio (LVR) limits. These are perceived as being too blunt and having a particularly detrimental impact on first home buyers, who struggle to raise the necessary 20% deposit.
Instead, it looks as if the RBA/APRA could raise interest rate buffers, according to The AFR today:
“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,’’ Dr Ellis [head of financial stability at the RBA] wrote on July 19, 2013.
This approach also appears to have the support of Reserve Bank boss Glenn Stevens, who told a parliamentary hearing in March the most effective macro-prudential tool for Australia could be for banks to impose tougher ‘’buffers”.
Mr Stevens said that under the approach, the Australian Prudential Regulation Authority ‘’could insist that the test be made 300 higher, or 400, or whatever, so that people do not get overcommitted.’’
Personally, I believe that raising interest rate buffers is a sound approach, and preferable to blunt LVR controls. And given the support for macro-prudential controls – from both the Treasurer and the IMF – it is only a matter of time before such measures are implemented in Australia.
About time, I say.
