APRA chair says latest lending curbs to ensure banks have adequate capital

The chief of the Australian prudential regulator has said its recent measures to restrict interest-only loans by banks was in response to heightened risks from the hot property market and to ensure that banks maintain adequate capital.

APRA chairman Wayne Byres’ remarks came during the keynote address at the AFR Banking & Wealth Summit 2017, and follow RBA Governor Philip Lowe's speech on Tuesday night when he expressed concern at the high proportion of interest-only loans and the taxation framework for property investors that has contributed to high home prices.

"Put simply, the capital adequacy framework needs to address the concentration in housing lending that has built up in the banking system over time: if we are going to put an increasing number of eggs into a single basket, we'd better make sure that basket is a (unquestionably) strong one,” Byres said.

He said the APRA will issue an information paper around the middle of the year, "which will set out the extent of further strengthening required, and the timeframe over which that can be achieved in an orderly manner”.

While it was not APRA's mandate to determine home prices, it had to act in response to market conditions, Byres said.

“Our role in the current environment is to promote a higher-than-normal degree of prudence – definitely by lenders and, ideally, also borrowers – in both credit decisions and balance sheet strength. On this occasion, we have focussed on interest-only lending to complement our earlier measures. 

Byres said that housing lending risks and bank capital adequacy are not independent issues.

“Beyond the recently-announced tactical responses to current conditions in the housing market, making sure the system is on a sound footing for the longer term is even more important."

He reiterated the pro-active stance of the regulator, saying it “can and will do more (or less) as conditions evolve".

Outlining the recent flurry of regulatory action, Byres noted that while measures such as the annual cap on investor lending growth of 10 percent and restrictions on interest-only loans have had and will continue to have a positive impact, at the same time the risks   haven’t moderated:

• house prices remain high;
• household income growth remains subdued;
• the already high ratio of household debt to income has got higher;
• the already low official cash rate has got lower (although not all of this reduction has flowed to borrowers, particularly investors - Chart 2); and 
• competitive pressures haven’t diminished.

He concluded by saying that APRA will be looking at many components of the capital adequacy framework, but "given its position as the dominant asset on the balance sheet of the banking system, the adequacy of capital requirements for housing-related risks will be a critical part of that assessment".