APRA Regulatory Measures
APRA Regulatory Measures
Authorised Deposit-taking Institutions (ADIs) like Banks, credit unions, and building societies play a pivotal role in the Australian financial system. One of their key functions is the creation of credit where ADIs use deposits to advance credit to others. This results in secondary deposits from loans, investments, and advances being higher than the primary deposits (Dwivedi 2010, p. 205). The success of these institutions relies on adhering to principles of good lending. These principles require that ADIs ascertain the suitability, safety, and profitability of the loan. It is worth noting that these basic principles should be followed regardless of the size of the loan. When it comes to safety, lenders use various approaches to measuring the credit risk of individuals and business. As such, it is clear that lenders have to consider factors related to the borrower and institutional policy when advancing credit.
External factors also have an impact on lending decisions. The Australian Prudential Regulatory Authority (APRA) regulates Australia’s financial sector that includes ADIs, Non-ADIs, and Insurers and Funds Managers (Reserve Bank of Australia 2016). In particular, the regulation of mortgages is of critical importance to APRA. This is because the housing sector supports the entire financial sector with housing loans amounting to two-thirds of all loans issued by Australian ADIs (Richards 2016). According to Richards (2016), standards that apply to the financial sector often vary depending on variations in the financial cycle. For example, a period of sustained economic growth might prompt lenders to loosen standards. However, the financial crisis illustrated the dangers associated with failing to follow the fundamental principles of lending. As such, regulators like APRA have to ensure that proper regulations remain in force across the periods of economic growth and recessions.
In 2014, APRA took measures to ensure the soundness of the financial sector. The measures applied to mortgage lending with the regulator undertaking an increased scrutiny of mortgage portfolios (Commonwealth of Australia 2016, p. 26). This measure will assist in preventing high-risk mortgage lending where loans are issued despite high loan-to-income/loan-to-valuation ratios and with extremely long terms (APRA 2014a). Those ADIs found to have issued such loans will suffer consequences like more supervision and having to increase their levels of capital (APRA 2014a). The result is that ADIs will have lower levels of risk in their mortgage portfolios.
The second measure taken by APRA involves reducing lending to property investors. According to APRA (2014a), increased lending to property investors creates an imbalance in the housing market. Additionally, these investors carry a higher level of risk that is transferred to the entire financial sector. Watt (2015) notes that reduced lending to this group was a successful measure since investor demand for property reduced in 2015 while the lower-risk dwelling investment increased. The measure also reduced imbalances in the housing market with housing prices going down thereby allowing more first-time buyers to acquire property (Watt 2015).
In addition to the increased scrutiny of portfolios and reduced lending to investors, the APRA also issued a guide on risk management in 2014 (Richards 2016). The APG 223 practice guide allows ADIs to conduct assessments that measure the soundness of various practices. These include loan origination practices, limits on vulnerable loan types, security valuation, stress testing, and managing hardship loans (APRA 2014b, p. 4). In summary, the measures introduced by APRA in 2014 were intended to ensure that ADIs follow the principles of lending and that they reduce their exposure to risky clients. The measures also created a clear guideline that highlights a range of good practices for credit risk managers.
APRA outlines further steps to reinforce sound residential mortgage lending practices, 2014a, Australian Prudential Regulatory Authority, viewed 4 September 2016 <http://www.apra.gov.au/mediareleases/pages/14_30.aspx>
Dwivedi, DN 2010, Macroeconomics, 3rd Edition, Tata McGraw-Hill Education, New Delhi.
Prudential Practice Guide: APG 223 – Residential mortgage lending, 2014b, Australian Prudential Regulatory Authority, viewed 4 September 2016 <http://www.apra.gov.au/adi/PrudentialFramework/Documents/20141103-APG-223.pdf>
RBA, 2016, Main types of financial institutions, Reserve Bank of Australia, viewed 4 September 2016 <
Review of the Australian Prudential Regulation Authority Annual Report 2015 (First Report), 2016, Commonwealth of Australia, viewed 4 September 2016 <http://www.aph.gov.au/~/media/02%20Parliamentary%20Business/24%20Committees/243%20Reps%20Committees/Economics/Review%20of%20the%20APRA%202015%20First%20Report/Final%20Report%20Web%20Version.pdf?la=en>
Richards, H 2016, A prudential approach to mortgage lending, Australian Prudential Regulatory Authority, viewed 4 September 2016 <http://www.apra.gov.au/Speeches/Pages/A-prudential-approach-to-mortgage-lending.aspx>
Watt, A 2015,
Investor demand for property cooling as APRA measures bite, Australian Property Investor, viewed 4 September 2016 <http://www.apimagazine.com.au/2015/12/investor-demand-for-property-cooling-as-apra-measures-bite/>