Under the new requirements, ADIs must be operationally prepared to implement certain macroprudential policy measures, if needed to avoid potential barriers to timely and effective implementation.
The new requirements are aimed at strengthening the transparency, implementation and enforceability of future policy responses aimed at reducing financial stability risks. Grant Thornton hosted a roundtable in February 2022 where we provided commentary on the proposed revisions and unpacked with our clients the potential impact on ADIs. We then made a submission on APRA’s consultation paper.
The submission focused on the following four areas that APRA responded on:
1. Providing more clarity on the measures proposed regarding:
a. Loan types expected to fall into each category, calling out interest only loans (such as construction loans) and lending with high LVR or DTI ratios but including guarantors (such as first home buyers or loans with Lenders Mortgage Insurance).
APRA’s response – Consistent with APRA’s macroprudential policy framework, APRA and the Council of Financial Regulators (CFR) will consider the broader impacts of potential policy options at the time, taking into account the risks that are being targeted, possible unintended consequences and alternative options. However, narrowing options today with specific carve outs, when future risks are not known, could reduce the effectiveness of APRA’s macroprudential policy toolkit.
b. Minimum lead times ADIs will be provided to comply with any new limits or lending standards, while managing pipeline and customer experience.
APRA’s Response – ADIs would be given advance notice on APRA’s concerns in the lead up to macroprudential policy interventions. APRA has also updated the new attachment to APS 220 to clarify that ADIs would be given at least one month notice, prior to any lending limits being implemented.
2. Increasing the focus on lending standard measures rather than lending limits – The ability for ADIs to implement changes to lending standards such as serviceability buffers is generally easier than having to apply lending limits as it is at an individual loan level and can be discussed with borrowers at the initial application phase.
APRA’s Response – As set out in APRA’s macroprudential policy framework, prior engagement with the Council of Financial Regulators (CFR) would also be an essential prerequisite for initiating any macroprudential policy response. This ensures that there is alignment, among financial regulators, on the assessment of the risk outlook and the need for a macroprudential policy response. It also provides an opportunity to assess the wider impacts of policy options, including potential economic and distributional impacts.
3. Proportionate application of the proposed measures – For a number of the proposed measures we emphasised the need for proportionality so as not to afford larger ADIs a competitive advantage.
APRA’s response – While APRA will consider the need for proportionality as part of future policy responses, an outcome where higher-risk lending simply migrates from larger to smaller entities would not be consistent with APRA’s macroprudential objectives.
4. Limitations on public disclosure which could negatively impact competition within the banking industry if customers use this information to make decisions about which ADI to approach for their financial services needs.
APRA’s response – APRA will consider ACCC advice as part of any future decisions to require public disclosure of macroprudential policy on a case-by-case basis.
APRA also provided further clarity on definition of borrower’s gross income and debt-to-income ratio to include HECS-HELP loans and debt incurred through buy ow pay later schemes
What are the expectations for ADIs?
- Closely monitor housing lending risks within appetite
- Review internal policies for compliance with revised APS 220 by effective date and corresponding amendments to Prudential Practice Guide APG 223 Residential Mortgage Lending
- Have systems in place to limit growth in higher risk residential mortgage lending, such as loans at high debt-to-income multiples or high loan-to-valuation ratios.