Banking watchdog lays out policy toolkit

·2-min read

Australia's banking watchdog has released a paper on the measures it has in its toolkit to promote the stability of the nation's financial system.

Australian Prudential Regulation Authority chair Wayne Byres said macroprudential policies were an essential part of the authority's toolkit aimed at fulfilling its statutory objective to promote financial stability.

"Unlike our day-to-day supervision of individual entities, macroprudential policies allow us to target risks to the entire financial system," he said.

"Whether it be curbing excessive risk-taking in a buoyant market, or conversely encouraging investment and economic activity during a downturn."

He said the paper was intended to give financial industry stakeholders a better understanding of the factors APRA considers in making decisions to use these tools and the types of it could deploy in the future.

However, the paper released on Thursday emphasised there is no mechanical link between any indicator and APRA's decisions on introducing macroprudential measures.

For example, strong growth in asset prices alone could present limited risks to financial stability where lending standards remain prudent and the banking sector is strongly capitalised.

"In contrast, growth that is driven by weak lending standards or higher risk loans would likely be a strong indicator that risks to financial stability are rising," the report says.

Among its toolkit it says imposing lending limits would be to restrain certain types of higher-risk lending, where these are contributing to risks to financial stability.

Adjustments to lending standards can also provide a targeted response to financial stability risks.

Last month APRA increased the minimum interest buffer it expects banks to use when assessing the serviceability of home loan applications.

It wants banks to assess applications at a rate three percentage points above the interest rate product being offered rather than 2.5 percentage points previously.

The decision came against the backdrop of house prices rising at their fastest pace in more than 30 years and strong demand for mortgages, with more than one in five new loans approved in the June quarter at more than six times the borrowers' income.

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