Credit risk

DTI limits and buffers in APRA’s arsenal to manage credit risk

Debt-to-income ratio limits and service buffer changes should be incorporated into APRA Standard for Credit Risk Management.

The Australian Prudential Regulation Authority (APRA) has written to banks seeking comment on its proposal to “formalise and integrating credit-based macroprudential policy measures into its prudential standard for credit risk (APS 220 Credit Risk Management).

The proposals include a set of credit-based macroprudential measures that could be used to address systemic risks, if necessary. It should also Authorized Depository Institutions (ADIs) to “pre-position in advance to overcome potential impediments to implementation, supporting a rapid response to any emerging risks”.

The changes focus on “risks” related to residential mortgages and commercial property loans, which account for more than 70% of total lending in Australia, according to the regulator.

Proposed credit-based macroprudential measures include:

  • Lending limits “enforced at the portfolio level”, which could be used to “moderate any excessive growth in high-risk loans during times of heightened systemic risks”
  • Minimum requirements for lending standards “applied at the level of individual loans”, which include measures such as the service cushion for residential mortgages

APRA will formalize and integrate these credit-based macroprudential policy measures via an attachment to its prudential standard APS 220 Credit Risk Management (APS 220).

It will require banks to:

  • Ensure they have the ability to limit the growth of certain forms of lending
  • Moderate higher risk lending during times of heightened systemic risk or meet particular lending standards, at levels determined by APRA
  • Ensure there are adequate reports in place to monitor limits

Loan limit details

For residential mortgages, APRA said banks should ensure they have the ability to limit the extent of lending in the following loan types:

  1. Loans with a debt-to-income ratio greater than or equal to four times or six times
  2. Loans with a loan-to-assessment ratio greater than or equal to 80% or 90%
  3. Loans for investment purposes
  4. Loan based on interest only
  5. Loan with a combination of two of the types specified in points (a) to (d)

Banks must also apply a buffer to a loan’s interest rate to assess a borrower’s creditworthiness of at least 3.0% (as previously announced), but the regulator said it “may do vary the minimum buffer level between 2.0 and 5.0%”.

For commercial real estate loans, banks should ensure that they have the ability to limit the scope of loans in the following loan types:

  1. Loans for the acquisition, development and construction of land
  2. Loans for investment purposes

“APRA will notify ADIs of any decision to set a limit, including the level of the limit and the date from which it would apply, for the types of loans specified in this attachment or other types of loans determined by APRA,” the regulator told ADI in a letter Thursday (November 11).

He said banks must also report to the board the level of lending against limits specified by APRA at least once a month, for the period the limits apply.

APRA may also require ADIs to publicly disclose the loan level against any limit specified by APRA, for the period during which the limits apply.

In addition to loan limits, APRA is also consulting on “a small change to the reporting definition of borrower income” for purposes of calculating debt-to-income and loan-to-income ratios (as per the ARS reporting standard 223 Residential Mortgages) to “ensure alignment with the new attachment”.

It proposes to change the definition of a borrower’s gross income to “the borrower’s annual pre-tax income verified by an ADI, excluding any mandatory pension contributions and before any discounts or discounts under the policy of ‘assessment of the usefulness of the ADI’.

“Change the way the measures can be applied”

APRA Chairman Wayne Byres pointed out that while the proposed amendments “do not alter the potential macroprudential tools that APRA may use, or provide APRA with additional powers”, they “rather change the manner in which certain measures may be applied”.

He explained: “At present, APRA’s ability to implement macroprudential measures is somewhat indirect, with credit measures generally being enforced through the potential imposition of higher capital requirements if necessary. . By defining certain credit measures in APS 220, APRA’s objective is to enhance the transparency, implementation and enforceability of macroprudential policy.

APRA said it could also broaden the scope of the macroprudential measures contained in APS 220 if, over time, other portfolios potentially grow in systemic importanceor other emerging risks – and may also review, add or revise the specified loan types on a regular basis “to ensure that the range of measures remains current and appropriate to the risk environment”.

However, any decision by APRA to put in place temporary limits for particular forms of lending or to set minimum requirements for lending standards would be communicated publicly and banks would be informed of any limits for the types of loans specified before the date from which they would apply, it said.

While the standard changes primarily impact banks, APRA suggested that non-banks should also consider the changes as “APRA expects that all rules, if introduced for lenders non-ADI, probably reflect those established for ADI” in the draft attachment to APS 220.

“If APRA were to determine that non-ADI lenders contribute significantly to the risks of instability in the Australian financial system, draft attachment to APS 220 sets out the main types of credit-based macroprudential measures that the APRA would probably apply,” Mr. Byres explained.

“As part of this consultation process, non-ADI lenders should consider the macroprudential measures set out in the draft attachment to APS 220. Any future rules introduced by APRA for non-ADI lenders would be legally binding and established under delegated legislation.”

Next steps

APRA is now asking for “specific comments” on any implementation issues that may arise from using the subprime loan definitions, as noted.

Written submissions on proposals should be sent to This email address is protected from spam. You need JavaScript enabled to view it. before February 28, 2022.

Beginning January 1, 2022, ADIs will be required to meet the previously finalized requirements of APS 220 Credit Risk Management.

The regulator plans to finalize its response to the consultation on the new attachment “in the first half of 2022”, with these new requirements coming into force shortly thereafter.

[Related: APRA makes move on home loan buffers]

DTI limits and buffers in APRA’s arsenal to manage credit risk


Last update: December 13, 2021

Posted: November 11, 2021

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Annie Kane

Annie Kane

Annie Kane is the editor of The Adviser and Mortgage Business.

As well as writing about the Australian brokerage industry, the mortgage market, financial regulation, fintech and the wider lending landscape, Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser webcasts. Live.

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