Australian Prudential Regulation Authority chairman John Lonsdale says he is open to changing bank rules on home loans if the economy deteriorates to ensure banks do not ‘‘choke off’’ credit and make the fall in house prices worse.
But the new head of the banking regulator was confident banks had sufficient capital buffers to withstand falls in house prices that economists predict could hit 20 per cent from their peak amid the fastest pace of interest rate rises in a generation.
“We watch housing very, very closely, as it affects the banks we regulate and it is very important in the Australian economy,” Mr Lonsdale told The Australian Financial Review in his first media interview since succeeding Wayne Byres at APRA in November.
“Two-thousand-and-twenty-three will be challenging. But we have done a lot of work over a long period of time to make sure the banks and the system is safe and stable – and we have a safe and stable financial system.”
Money markets are expecting a quarter percentage point rate rise on February 7, and another increase on March 7, before the Reserve Bank pauses ahead of a possible final rate increase by mid-year. This could push the 3.1 per cent cash rate to 3.85 per cent, a level not reached since 2012.
Meanwhile, capital city house prices are expected to fall over the first half of this year, after dropping 7.1 per cent last year. Leading economists expect a further fall of about 8 per cent, resulting in a top-to-bottom fall of 15 to 20 per cent. Mr Lonsdale said capital levels built up by the banks since the financial system inquiry and the ongoing focus on lending standards would allow banks to cope with a fall of this magnitude.
“We have built a very strong capital framework that provides a lot of buffer in the system. At the heart of it is the ‘unquestionably strong’ reforms, which we are embedding,” he said.
“Second, is pursuing very sound lending standards, and we have been doing that for a few years.
“That has set the system up – if you look at prudential metrics right now, they look very good. We have strong capital, strong liquidity and credit standards are very good. We sail into 2023 in a good position from a system point of view, and entity point of view.”
Mr Lonsdale reiterated a warning to the banks that they should not seek to appease the bond market by refinancing long-term ‘‘tier II’’ bonds at more expensive market interest rates, given it is designed to protect depositors and make the banking system more stable.
As APRA scrutinises high levels of household debt, Mr Lonsdale declined to say whether indebtedness should form part of the RBA’s thinking as it considers an appropriate peak cash rate.
“Interest rates and monetary policy is an issue for the [central] bank,” he said. “In terms of indebtedness, it is certainly a factor we look at very, very closely because it is important to the stability of the system. But I don’t want to go any further on that.”
Mr Lonsdale said he was comfortable with current controls on bank lending for housing, but if the economy were to deteriorate he would be open to changing the macroprudential policies to ensure banks do not “choke off credit”, which could exacerbate house price falls.
Declaring APRA’s macroprudential settings – including the “serviceability buffer”, which requires banks to assess new loans at a rate 3 per cent higher than prevailing market rates – the right policy at this time, he said the regulator would consider readjusting its rules to respond to lower credit growth or house prices.
This would ensure credit continued to flow in the face of more aggressive official rate rises to reduce inflation, and as hundreds of billions of dollars of fixed-rate mortgage reverted to much higher variable rates.
“As I sit here before you now, we think the macroprudential settings – including the serviceability buffer, which is just one of them – are appropriate,”
he said. ‘‘But if the facts change, our views might change too.’’
APRA lifted its serviceability buffer, which banks apply to ensure customers can cope with future rate rises, to 2.5 per cent from 2 per cent in mid-2019, and then to 3 per cent in October 2021. The RBA has raised rates by exactly this amount since May.
But markets now expect that after a few more cash rate rises, the RBA could start easing rates early in 2024. Any reconsideration of the serviceability buffer would show APRA was also preparing for rates to peak.
“It is very much a trade-off,” Mr Lonsdale said about setting buffers. Their main focus was protecting bank depositors by ensuring lending standards were strong.
But buffers would be counterproductive if they were so restrictive that they made it tougher to buy houses even as prices fell, adding to systemic risk given big bank lending was so concentrated in mortgages.
“We knew things were going to become more difficult [when we increased the buffer in 2021],” he said.
“But at the same time, we have got to balance not choking off credit – there is a difficult balance there that needs to be struck.”
In a wide-ranging interview, Mr Lonsdale detailed other key focus areas for APRA this year, including lifting governance standards in the superannuation sector, bolstering ‘‘operational resilience’’ including cybersecurity defences after the Medibank attack, and strengthening disclosure rules for banker pay.
Its supervisory and policy priorities, including around climate change, will be released later this week.
Other priorities for APRA this year include more intense supervision of the superannuation sector, an area where APRA has come under criticism since the royal commission.
“We are going to improve investment governance of super, on stress testing, valuation and liquidity management,” Mr Lonsdale said.
After APR’’s “climate vulnerability assessments” last year found banks strong enough to withstand growing stresses from climate-related issues, he said climate “will be a key plank of supervision priority this year”.
Another obvious focus is operational resilience, after APRA-regulated Medibank Private suffered a loss of trust from a devastating cyberattack. He flagged potential regulatory action against the health insurer when the findings of reports into the incident become clearer.
“On Medibank, their reviews are under way, and we will have a look at those reviews – the important thing is they get to the root cause of issues and remediation takes place, and we will look at enforcement if we need to,” he said.
He also warned banks not to forget the lessons of the Hayne royal commission. It was their lack of attention on risk culture that was the “root cause of what went wrong” and he said APRA would continue to conduct risk culture surveys of banks and boardrooms to ensure higher standards are maintained.
“I don’t see it fading at all. There is a legacy of the royal commission we have certainly built into our supervision. We have a much clearer sense of accountabilities of executives operating in banks, of who is accountable for what, and the FAR [Financial Accountability Regime] will embellish that if it gets passed by the parliament.”
APRA will also this year complete remuneration rules, to standardise bank disclosure of pay.
