The Australian Prudential Regulation Authority (APRA) has confirmed it will keep its macroprudential policy settings on hold following its latest quarterly assessment of domestic and international economic conditions.

APRA’s macroprudential policy toolkit is aimed at promoting stability at a systemic level to ensure financial institutions can continue to supply the credit and payment services required for the economy to grow at a sustainable rate. It comprises three core tools: the countercyclical capital buffer, the serviceability buffer and limits on bank lending.

In reaching a decision to retain its current settings, APRA took into account an uncertain interest rate and economic outlook, with high levels of household debt and inflation still above the Reserve Bank of Australia’s target range, as well as ongoing geopolitical instability.

Balancing these risks, APRA noted that the quality of new housing lending remains sound, and while arrears rates on mortgage and business lending portfolios continue to rise slowly, they remain below Covid peaks.

As a result of these considerations:

• the countercyclical capital buffer will remain at 1.0 per cent of risk weighted assets;
• the mortgage serviceability buffer will be kept at 3 percentage points; and  
• lending limits have not been applied.

Chair John Lonsdale said APRA was concerned that the level of overall risk to the financial system remained elevated.

“Our macroprudential policy settings play an important role in guarding against risks to the financial soundness of banks that could, in turn, undermine the stability of the Australian financial system.

“Looking across the economy, we can see that credit growth for home purchases has moderated from its heights during the pandemic and is now a little below its long-term average. High debt-to-income and high loan-to-valuation ratio lending make up only small proportions of new lending. Lending standards remain sound with banks able to make exceptions to their serviceability policy when it is prudent to do so.

“Business credit is growing above historical averages, however commercial property prices continue to fall, driven by office and retail sector weakness.

“While the level of non-performing loans across both residential and commercial portfolios remains relatively low, it is slowly trending upwards. Given the uncertain economic and interest rate outlook, including the possibility of higher cost-of-living pressures, it is important that prudent buffers are incorporated in serviceability assessments.

“APRA will continue to monitor closely bank lending standards and the broader operating environment and should we believe a change in macroprudential settings is necessary, we will make the appropriate adjustments where needed,” Mr Lonsdale said.