APRA proposes amendments to APS 220 Credit Risk Management

APRA’s objective in the new attachment is to “strengthen the transparency, implementation and enforceability of macroprudential policy”, says Wayne Byres, with a focus on risks in residential mortgage lending and commercial property lending.

The proposed attachment would require ADIs to:

• Ensure they have the ability to limit growth in particular forms of lending;
• Moderate higher risk lending during periods of heightened systemic risk or meet particular lending standards, at levels determined by APRA; and
• Ensure adequate reporting is in place to monitor against limits.

The proposed credit measures relate to temporary lending limits, aimed at moderating excessive growth during high-risk periods, and lending standards, such as the serviceability buffer for residential mortgages whereby lending limits are imposed to ensure a mortgagee can continue to make mortgage repayments as interest rates increase, for example.

The proposal doesn’t afford APRA with additional powers.

The potential macroprudential tools APRA may use remains unchanged, as well as APRA’s power to enforce the APS 220 standard, though the proposal highlights changes in the way certain measures may be applied.

Non-ADIs

Naturally, the majority of the changes directly affect ADIs. However, should APRA determine that non-ADI lenders are materially contributing to risks of instability in the Australian financial system, the credit-based macroprudential measures outlined in the proposed attachment would likely be applied.

Lending limits

For residential mortgage lending, ADIs must ensure an ability to limit the extent of lending in the following loan types:

(a) lending with a debt-to-income ratio greater than or equal to four times or six times;
(b) lending with a loan-to-valuation ratio greater than or equal to 80 per cent or 90 per cent;
(c) lending for the purposes of investment;
(d) lending on an interest-only basis; or
(e) lending with a combination of any two of the types specified in (a) to (d).

APRA will notify ADIs of any decision to set a limit, including the limit level and the date from which it would apply.

Additionally, the level of the serviceability buffer must be at least 3.0 per cent. APRA may “vary the minimum level of the buffer between 2.0 and 5.0 per cent”.

For commercial property lending, ADIs must ensure an ability to limit the extent of lending in the following loan types:

(a) lending for land acquisition, development and construction; and
(b) lending for the purposes of investment.

Next steps

APRA is seeking consultation from industry up until 28 February 2022.

Review the information paper and consider the impacts on your organisation as well as any feedback that may be appropriate to provide to APRA as part of its consultation . We welcome conversations on the proposed changes and what this means for our clients.

APRA intends to respond in the first half of 2022 and the new requirements would likely be implemented shortly thereafter.

Read more in APRA’s information paper here.