One of the great challenges facing the Reserve Bank and the Australian Prudential Regulation Authority is who should be front of mind as interest rates and financial pressure on households grow.
The capital buffers were not likely to be tinkered with, and they haven’t been. APRA could reduce its countercyclical capital buffer to provide the banks with flexibility to lend in times of stress, but the extraordinarily low levels of bad debts in the banks’ loan books suggests there’s little of that.“Key indicators of stress suggest that economic conditions are not at a point where this would be required,” APRA’s review says.
The good news is that the serviceability buffer, introduced in December 2014 and then raised from 2.5 per cent to 3 per cent in October 2021, appears to be working. Housing loans with a loan-to-value ratio above 90 per cent have fallen from above 10 per cent in late 2021 to around 6 per cent at September 30, below long-term averages. And loans written where the borrower has a debt-to-income ratio above six times have fallen from 23 per cent in September 2021 to 17 per cent.
It’s true that lowering the serviceability buffers might help riskier borrowers get loans. But should more of these borrowers be taking on more debt at this point of time? APRA clearly remains concerned.