APRA’s lending macro policy worked: RBA

The Reserve Bank of Australia (RBA) has released a research discussion paper in which it declared that macro-prudential policies implemented by the Australian Prudential Regulation Authority (APRA) targeting the housing market twice between 2014 and 2018 achieved their goals and contributed to reducing risk in the financial system.

The paper, titled Macroprudential Limits on Mortgage Products: The Australian Experience, said the “broad aim of macro-prudential policy is to manage systemic risk in the financial sector”.

The authors of the RBA paper said: “Our results show that despite some initial difficulties and unexpected effects, banks reacted by reducing growth in risky types of lending targeted by the regulator.

“As such, our results suggest that these macro-prudential policies achieved their stated aims and contributed to a reduction in risk in the financial system”.

APRA’s policies targeting the housing market between 2014 and 2018 were aimed at risks that were building in speculative sections of the mortgage market, which, at the time, were viewed as having the potential to intensify housing market dynamics and economic fluctuations.

The first policy announced in late 2014 required banks to limit their annual growth to investor mortgages to no more than 10 per cent.

The second policy announced in early 2017 required banks to limit their lending in interest-only mortgages to no more than 30 per cent of their total new housing lending.

APRA removed the limits when they felt that there had been sufficient improvement in lending standards and the identified risks had reduced.

According to RBA research, both policies quickly decreased aggregate growth in the types of lending that APRA was targeting. To meet APRA’s limits, banks slashed the growth of new lending of the targeted loan types by around 20 to 40 percentage points within a year, having raised interest spreads on such loans by around 10 to 30 bps.

However, the research found that large and mid-sized lenders reacted differently to APRA’s policies.

The four major banks transitioned their lending into mortgage types not targeted by APRA’s policies. For example, when financial institutions cut interest-only lending, large banks increased their principal and interest lending, but mid-sized banks did not mirror this strategy.

“The reason for this difference in substitution behaviour is not entirely clear, but it is plausible that large banks’ operational systems were more capable of implementing a portfolio shift,” the paper stated.

As a result, larger banks sustained their overall mortgage growth, while the overall mortgage growth declined across the 20 or so other mid-sized banks in the RBA researchers’ sample.

“These bank-level patterns are statistically significant but, in aggregate, coincide with only a small temporary pick-up in large banks’ mortgage market share relative to the other sample banks,” the research paper said.

“To our knowledge, we are the first to show that banks’ credit allocation reactions to macro-prudential policies depend on their size.”

The research paper has been released amid discussions and predictions about when regulators may strike with tighter lending standards, with Westpac expecting a move to tighten conditions in the first half of 2022.

The central bank has stated repeatedly that it is closely monitoring the uptick in household borrowing for home loans but that it does not and should not target house prices.

It has also underscored the importance of lending standards remaining sound in an environment of rising house prices and low interest rates.

RBA governor Dr Philip Lowe has also reported that while the Council of Financial Regulators (CFR) is monitoring banks’ lending standards and levels of household debt, he is yet to see any evidence of any issues.

Household debt growth is currently higher than income, but “not massively higher”, the governor said.

However, should debt increase, the RBA is considering launching policy tools that it has been exploring, including increasing the interest serviceability buffer for banks, and imposing restrictions on portfolio loan-to-value and debt-to-income ratios.

APRA recently wrote to authorised deposit-taking institutions to “seek assurances” that they are proactively managing risks within their housing loan portfolio, and will maintain a strong focus on lending standards and lenders’ risk appetites.

The CFR – which includes the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, the Australian Treasury, and the Reserve Bank of Australia – said that overall lending standards in Australia have remained sound, but noted that there have been signs of some increased risk-taking recently.

[Related: APRA issues capital framework changes update]

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.