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The prudential regulator has told the Senate inquiry that it believes the 3 per cent buffer is appropriate, but highlighted that lenders are able to utilise exceptions, where appropriate.
The Australian Prudential Regulation Authority (APRA) has countered suggestions that serviceability buffer reform may be necessary, saying that banks are already able to utilise buffer exceptions, where appropriate.
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The second and final hearings for the Senate inquiry into the financial regulatory framework and home ownership were held by the economics references committee – chaired by senator Andrew Bragg – on Thursday (24 October), where the prudential regulator was called to give evidence on financial regulation.
Given that the Senate inquiry had received multiple recommendations regarding how lending laws could be changed to improve home ownership, particularly for first home buyers, the regulators were quizzed on whether serviceability buffers or other lending rules could be amended (as recommended by members of the broking industry and some members of the banking industry, too).
However, APRA reiterated that it believes the current settings are appropriate to ensure that the financial system is strong, saying that home lending is continuing to grow.
Speaking on behalf of APRA, executive board member, Therese McCarthy Hockey, said that the buffer forms part of a broader set of tools to ensure overall financial system stability, rather than targeting it at any specific borrower class or interest rate environment.
She said that the buffer is also not set based solely on interest rate cycles, but rather on a broad range of factors including income, expenses, credit leverage, and asset prices.
However, the APRA delegation said that the body regularly reviews the calibration of the buffer to ensure it is appropriate and not causing unintended consequences (including by consulting with other Council of Financial Regulators (CFR).
“Our tools are not geared to solving an affordability challenge, but rather the provision of finance. And out of the data [we’ve seen], it’s holding up and including for first home buyers,” she said.
“It’s not about the interest rate cycle, we certainly aren’t trying to predict where, over a full life of a loan, rates may go. That’s certainly not what we’re doing. We’re looking to make sure we’ve got resilience.”
Overall, the APRA delegation said that while they were watching economic data carefully (including home loan arrears rates and the unemployment rate), they did not see major concerns that would warrant changing the 3 per cent buffer at this time.
Around 5% of bank loans now have an exception
However, APRA did say that banks were able to utilise exceptions to the 3 per cent buffer and a growing proportion of loans had an exception.
She said that the proportion of loans with buffer exceptions has risen from around 2 per cent of bank loans to nearly 5 per cent.
“So we can see that banks are making exceptions, which we expect and support them to do for the right kind of borrower, such that they are in the position to be able to maintain and get their obligation,” McCarthy Hockey said.
“I think it’s important to note that not all first home buyers are alike. Borrowers have discrete features.
“[But] we’re talking about here the overall system stability, the provision of credit – which is holding up – and that banks, who know the customers best, are able to make those judgements, and that flexibility is available and is being used.”
Despite the testimony, following the final day of hearings, Senator Bragg said that lending laws were too rigid.
Senator Bragg said that the evidence “exposed the blunt rigidity of the mortgage rules set by bureaucrats”, noting that “even the prudential regulator has described these interventions as ‘broad’”.
“The serviceability buffer has been unresponsive to market events and monetary policy,” he said.
“As we reach the likely top of the tightening cycle, the hypothetical 3 per cent buffer no longer reflects the reality of mortgage serviceability.”
In his conclusion, the committee chair and Liberal senator seemingly lamented that APRA’s mandate does not take first home ownership into consideration when setting lending standards.
He said: “Labor does not want a more flexible system to help first home buyers enter the market.
“Labor has presided over a housing nightmare. It has done nothing creative to help first home buyers.”
The Senate economics references committee will now review all the evidence and create a final report, which is due by 5 December.
[Related: Lending laws ‘holding back the Australian dream’: Senator Bragg]
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