APRA publishes assessment of macroprudential settings

The Australian Prudential Regulation Authority (APRA) has released an update on its assessment of macroprudential policy settings.
The purpose of macroprudential policy is to mitigate risks to financial stability at a system-wide level, aimed at addressing risks to the financial system as a whole, rather than just focusing on individual institutions. APRA published a Macroprudential Policy Framework in 2021, which detailed the objectives, toolkit, and implementation process. The framework includes a range of policy measures that can be used to promote stability at a systemic level, including capital and credit measures.
The current macroprudential policy settings are a 1% neutral level for the countercyclical capital buffer (CCyB) and a 3% loan serviceability buffer. The CCyB is a buffer that can be relaxed if needed by APRA in a downturn, to provide banks with flexibility to absorb rather than amplify the impact of systemic shocks. The serviceability buffer is a measure designed to ensure that borrowers can still afford their mortgage repayments even if interest rates rise.
The present update provides greater transparency on macroprudential policy in line with the above 2021 framework, assessing that the existing macroprudential policy settings remains appropriate in the current risk environment:
APRA has maintained these settings because it believes that existing macroprudential policy settings remain appropriate in the current risk environment. The CCyB has been set at a neutral rate of 1% of risk-weighted assets (RWA), which was instituted as part of recent reforms to the bank capital standards. Key indicators of stress suggest that economic conditions are not at a point where a relaxation of the CCyB would be required, and credit growth remains positive.
APRA has also maintained the serviceability buffer at 3% above the loan rate. This buffer was increased to this level in late 2021, in an environment of heightened risks for the financial system. While lending at high debt-to-income ratios has reduced, a key concern at the time, heightened risks to serviceability remain. There is the potential for further interest rate rises, high inflation, and risks in the labor market. It is important that all banks maintain prudent lending in the current environment of competitive pressure on standards.
Looking ahead, APRA will continue to monitor key risk indicators. In particular, APRA is closely monitoring credit growth, asset prices, lending conditions, and financial resilience. There is a high degree of uncertainty in the outlook, and while there are signs of a deterioration in conditions, lending standards are broadly sound, loan arrears remain low, and the banking system is well-capitalized. Should risks to financial stability change, APRA will adjust its macroprudential policy settings accordingly.