Loan buffers staying for now

Loan buffers staying for now

James Frost – Australian Financial Review – Friday 29 May 2020

The Australian Prudential Regulation Authority has dismissed a suggestion that it should relax an artificial lending hurdle in recognition of record low interest rates, saying there was no evidence credit was not flowing to where it was needed most.

APRA chairman Wayne Byres was responding to a question about the potential for the regulator to relax serviceability buffers designed to protect investors from rising rates, in recognition of the emergency low interest rates that are expected to remain subdued for some time.

Mr Byres was being needled by Liberal senator James Paterson, who asked whether the buffers that required banks to assess a customer’s ability to repay a loan at 250 basis points above the actual rate paid needed to be lowered by 50 basis points to increase the flow of credit.

“I think we would be very careful in this environment when it comes to loosening credit standards,” Mr Byres said during the webcast hearings.

He said the serviceability buffer acted as an effective proxy for a range of issues that tended to crop up for borrowers, including unexpected reductions in income, illness or divorce.

APRA last relaxed the buffer as recently as 12 months ago when it changed the formula that set a hard floor of 7 per cent or 200 basis points above the rate – whichever was greater – in exchange for a flat 250 basis points above the prevailing rate.

Banks typically tacked another 25 basis points on top just to be sure.

Mr Byres was joined by deputy chairs Helen Rowell and John Lonsdale and board member Geoff Summerhayes to examine the government’s response to the COVID-19 pandemic.

Banks have now deferred about a quarter of a trillion dollars in home loans, according to the latest APRA data.

Mr Byres said it was likely not all of the borrowers would be able to return to regular repayments but the quantum was impossible to quantify at this point.

“We can’t keep pretending that everything is in good shape when there are customers who are going to be unable to pay their loans,” Mr Byres said.

He said it was important to remember that bank balance sheets “were highly correlated to the economic environment” and would sustain some collateral damage one way or another.

“No one has an interest in going off the cliff so we have to work out what the next phase is going to be and that will depend on what the economic situation is at the time,” Mr Byres said.

Much of the hearing centred on the early access to superannuation scheme.

Labor senator Kristina Keneally expressed surprise that the prudential regulator was not monitoring the compliance of applicants with the scheme’s criteria.

Ms Rowell patiently explained that its role in the scheme had been limited to giving the federal government advice on the scheme’s impact on the financial system and liquidity of superannuation funds but it was not responsible for the approval or rejection of individual applications.

“The way the scheme has been established and the way applications are assessed rest with the Tax Office, not with APRA,” Ms Rowell said.

Mr Byres has also rejected the notion that the superannuation early release scheme was just a transfer of wealth from the individual to the banking system, saying there was no evidence users of the scheme were using their retirement savings to pay down their mortgage.

“Banks have been generally quite accommodating for mortgage deferrals. Consumers who have wanted to defer their mortgage payments have been able to do so … I expect it’s been used for other things … it’s an option for people in a very difficult time.”

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