RBA looks at global context for lending restrictions

author-avatar By on October 08, 2021
RBA looks at global context for lending restrictions

The RBA's Financial Stability Review has highlighted macroprudential methods used overseas, designed to promote financial stability.

Low interest rates have contributed to high prices for financial assets and housing. The report said there has been some increased risk-taking and higher borrowing.

The report warned that a sustained acceleration in housing credit growth would add to risks related to the already-high level of household debt.

AMP Capital's Chief Economist Shane Oliver, highlighted the international lense of the RBA, who looked at international macro prudential policies (MPP) that may influence Australia's in the future. 

There are a range of MPP tools that have been used internationally to target different types of risks.

The choice of tools depends on the structures of housing and lending markets, implementation costs, competition concerns and other distributional consequences for borrowers, as well as the policy tools the macro prudential authority has at its disposal.

The top three include serviceability restrictions, like what was introduced by APRA recently, debt-to-income restrictions, and loan-to-value restrictions.

Serviceability restrictions constrain lending to borrowers who would have limited income left after meeting basic living expenses and servicing their debt. Measures include interest rate buffers/floors and restrictions on debt-servicing costs relative to income.

Debt-to-income (DTI) restrictions limit the maximum amount households can borrow relative to their incomes. For affected new borrowers, this would cap their debt-servicing costs for a given interest rate and ensure they have larger cash buffers when they take out their loan.

Loan-to-valuation (LVR) restrictions  limit the amount that can be borrowed relative to the value of the property, and constrain the supply of credit to borrowers with low equity and liquidity buffers.

They can reduce the size of losses to lenders in the event of a mortgage default, and could also reduce the decline in household consumption when wealth falls (this decline can be magnified by leverage).


The RBA's report also warned that 'unsustainable' debt trends could emerge in an environment of rapidly rising property prices, with new borrowers stretching their financial capacity and a greater chance of defaulting on loans in the future.

APRA has indicated it will publish an information paper outlining its holistic framework for further MPP later this year.

Loan commitments data suggest that housing debt could be growing by around 10% in six-month ended annualised terms by early next year from an already high level, increasing systemic risk according to the central bank.

The report emphasised that sound credit standards and macro prudential policy (MPP) measures that seek to manage risks to individual lenders are the first line of defence.

The financial sector is expected to remain healthy and well positioned to support a robust expansion from late 2021.


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Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

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Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

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Aaron joined Savings.com.au in 2021. He is a finance journalist with a keen interest in property, the share market, and improving financial literacy in young Australians.

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