APRA keeps CCyB on hold

30 January 2019

The Australian Prudential Regulation Authority (APRA) has decided to keep the countercyclical capital buffer (CCyB) for authorised deposit-taking institutions (ADIs) on hold at zero per cent.

The regulator said that the core economic indicators that contributed to this decision were:

  • moderate growth in housing and business credit over 2018;
  • a decline in higher-risk categories of new housing lending, including interest-only loans, investor loans and lending at high loan-to-value ratio (LVR) levels; and
  • continued strengthening in ADIs’ capital positions as they move to implement the requirements of “unquestionably strong” capital ratios.

The CCyB was an additional amount of capital that APRA can require ADIs to hold at certain points in the economic cycle to bolster the resilience of the banking sector during periods of heightened systemic risk.

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Following this, APRA detailed new objectives for its interventions in the residential mortgage lending market aimed at reinforcing sound mortgage lending standards and increasing the resilience of the banking sector due to heightened risks.

These risks included an environment of rising household debt, subdued wage growth, rising house prices, and an erosion of bank lending standards at a time of historically low interest rates.

Additionally, according to the APRA’s paper, ADIs should help improve the quality of their lending standards as well as policies and practices across the industry.

APRA’s chairman, Wayne Byres, said that after the announcement of the removal of the investor and interest-only benchmarks last year, APRA was in a position to review the impact of its regulatory actions and reflect on whether their objectives had been achieved.

“APRA could have chosen to utilise the countercyclical capital buffer as a means of building resilience in the banking system. However, APRA took the view that the better course of action was to address, through targeted measures, the underlying concern – the erosion in lending standards driven by strong competitive pressures amongst housing lenders,” he said.

In conjunction with the other agencies on the Council of Financial Regulators, APRA would continue to closely monitor economic conditions, and would, the regulator said.

Also, it would adjust the CCyB if future circumstances warrant it.  APRA also considered setting the buffer at a non-zero default rate as part of its ongoing review of the ADI capital framework.

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