The Australian Prudential Regulation Authority (APRA) has published the opening statement given to the Senate Standing Committee on Economics by Wayne Byres today. He appears to deflect focus from macro prudential intervention.
Recent comments in the Reserve Bank’s Financial Stability Review about emerging imbalances within the housing market, and the need to reinforce sound lending practices, has been interpreted in many instances as Australia being on the verge of macroprudential interventions of the type that have been instituted in a number of other jurisdictions around the world, such as hard limits on certain types of loans, or minimum deposit requirements for borrowers. While we are very much still in the investigation stage, and have not yet decided what further action we might need to take, I would like to make two points in response to the general commentary currently taking place:First, within our regulatory framework APRA generally seeks to avoid outright prohibitions on activities where possible: instead, our regulatory philosophy is to focus on institutions’ setting their own appetite for risk. We also use the regulatory capital framework to create incentives for prudent lending and ensure that, while institutions remain free to decide their lending parameters, those undertaking higher risk activities do so with commensurately higher capital requirements. That is not to say that we would never use the sorts of tools being employed elsewhere, but they are unlikely to be the first ones we reach for.That brings me to my second point responding to potential risks in the housing market in this way is not new. We see it as standard supervision. In the period from 2002 to 2004, for example, there was a similarly strong run-up in house prices, and similar concerns about higher risk lending and emerging imbalances. We’re doing now what we did then: collecting additional information, counselling the more aggressive lenders, and seeking assurances from Boards of our lenders that they are actively monitoring lending standards. We’re about to finalise guidance on what we see as sound mortgage lending practice, and we’ve conducted a comprehensive stress test of the largest lenders. The sources of risk are different this time around – last time we were focussed on low doc and no doc lending – but the response of higher supervisory intensity and regulatory requirements in the face of higher risk activity is not new. It is APRA doing its job.
We have already highlighted the potential to adjust capital risk weightings as a mechanism to control risk, and it may be that the upcoming G20 will decide on lifting capital weights. However, we believe there is a role for targetted macroprudential measures in the investment housing sector as the argument is not just about risk per se, rather it is the fact that in the current low rate environment too much lending is going into unproductive establishing housing investment, rather than lending for productive growth. This point was well made in the speech yesterday by Philip Lowe, RBA Deputy Governor in an address to the Commonwealth Bank of Australia’s 7th Annual Australasian Fixed Income Conference in Sydney – Investing in a Low Interest Rate World. He concluded:
Very low global interest rates have been with us for some time. And it is likely that they will stay with us for some time yet.
Fundamentally, this reflects the low appetite for real investment relative to the appetite for saving.
These low rates are encouraging investors to buy existing assets as they seek alternatives to bank deposits earning very low or zero rates. Asset prices have increased in response.
Some of this is, of course, desirable and, indeed, intended. But the longer it runs on without a pickup in the appetite for real investment, the greater is the potential for new risks to develop. During this period, while we wait for the investment environment to improve, we need to be cognisant of potential risks of asset prices running too far ahead of real activity. This is true in Australia, as it is elsewhere around the world.
The underlying solution is for an improvement in the investment climate. Monetary policy can, and is, playing an important role here. But ultimately, monetary policy cannot drive the higher ongoing expected returns on capital that are required for sustained economic growth and for reasonable long-term returns to savers. It is instead government policy – including in some countries, increased spending on infrastructure – that has perhaps the more important role to play here.
