RBA Favors Loan Oversight Over Curbs in Property, Papers Show

The Reserve Bank of Australia has examined a range of macro-prudential tools and favors closer supervision of lending over “tick-a-box” regulations to help deal with a property boom, documents show.

Among tools examined, including lending caps and increased capital requirements, the RBA sees loan tests that include buffers for higher interest rates as preferable, papers released today under a Freedom of Information Act request showed.

“Other than avoiding an over-easing of monetary policy, the most promising policy response seems to be to introduce a regulatory regime that automatically requires larger interest buffers in loan affordability calculations when interest rates are low,” Luci Ellis, head of the RBA’s Financial Stability Department, said in a document dated July 19.

Property prices have surged, along with concern homes are becoming unaffordable, as the central bank cut interest rates to a record low and signaled a period of steady borrowing costs. The RBA has eschewed tools to rein in home prices as it seeks to spur residential construction to help offset a slowdown in mining investment.

“The RBA is clearly reluctant to introduce macro-prudential measures,” said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “Any steps would likely be left to the banking regulator to implement after robust discussion.”

In a March 2013 paper titled “Macro-prudential policy: What have we learned?” also released today, Ellis said “it is our observation that the experience of recent years has vindicated an approach to prudential policy that puts more emphasis on supervision, rather than being narrowly focused on ‘tick-a-box’ regulation and compliance.”

APRA’s Role

Along with conducting monetary policy, the RBA’s charter tasks it with controlling risk in the financial system. The Australian Prudential Regulation Authority is the regulator of the financial services industry, overseeing banks, credit unions, building societies, insurers and pension funds.

A separate set of slides released in the FOI request said the RBA is “not in the business of overriding APRA’s prudential bailiwick” and doesn’t think “a fixed toolkit of levers and buttons” is a good way to approach the issue.

Given that Australia’s prudential framework is well designed and the exchange rate regime allows policy makers to run monetary policy appropriately, the RBA questioned whether any other tools are required to “lean against” credit growth in the business cycle, the slides showed.

Low Rates

The central bank’s record-low 2.5 percent benchmark rate helped drive a 14.1 percent gain in Sydney dwelling prices in the 12 months to Feb. 28. The RBA, balancing surging property and an elevated currency, finds itself in a similar position to New Zealand last year, which opted for macro-prudential measures to curb lending risks.

“Good practice would suggest that the difference between actual and qualifying interest rates should increase when actual interest rates are unusually low,” Ellis said in the discussion papers. “Liaison suggests that many, if not all, lenders do this, but there is a case for doing more to ensure that interest rate buffers are countercyclical to actual interest rates.”

Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. said in January they ensure customers can maintain repayments when rates rise when assessing mortgage applications.

About 71 percent of Westpac borrowers are ahead on their home-loan payments, a spokeswoman for the bank said then. ANZ Bank in July raised its “sensitivity buffer,” the level of rate increases borrowers can tolerate, by 25 basis points to 2.25 percentage points, a spokesman said. NAB verifies a borrower’s existing commitments and income before approving a loan.

RBNZ Curbs

Under the Reserve Bank of New Zealand’s lending limits introduced on Oct. 1, loans for more than 80 percent of a property’s value must account for no more than 10 percent of a bank’s new lending, down from about 30 percent.

Ellis’s paper suggested that the capping of loan-to-value ratios might be missing the mark in the Australian context.

“The negative distributional effects on first-home buyers have deterred the authorities in the United Kingdom and elsewhere from introducing this tool,” it said. “This issue is particularly relevant in the Australian environment, where much of the boost to borrowing could come from buy-to-let investors, who generally have lower LVRs at origination than owner-occupiers.”

Tax Review

A review of Australia’s tax system could be helpful for residential property, Ellis said in the July paper, as it can shape households’ predisposition to take on property debt, particularly among investors, the documents showed.

“Changes to tax regimes have the advantage that they can be targeted reasonably precisely at speculative behavior and risk,” she wrote. “However, any taxation changes should be considered a one-off fix rather than a countercyclical tool, given the implementation lags involved.”

RBA Governor Glenn Stevens foreshadowed today’s release in testimony to lawmakers three days ago. He said a more appropriate tool could be for banks to test the ability of people applying for a loan to repay mortgages at a higher interest rate.

“They are a useful adjunct, but if we do use them we should go into this with a bit of realism,” Stevens told the parliamentary panel when asked if macro-prudential tools were being considered by the RBA.

Access Denied

The central bank declined to release some details, including a record of discussions between the RBA and APRA on macro-prudential issues and an e-mail on a Draft Prudential Practice Guide on Home Lending.

The March 2013 paper from Ellis said the central bank didn’t propose to introduce a set of tools as a separate “macro-prudential regime” any time soon.

“The lessons of the crisis have not been, in our view, that we should rush into deploying numerical ‘macro-prudential’ tools, or that countries necessarily need a macro-prudential policy function separate from the supposedly micro-prudential regulator,” she said. “In our view, macro-prudential policy is more of a state of mind than a suite of tools.”

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