DTI limits and buffers in APRA’s arsenal for managing credit risk

Limits on the debt-to-income ratio and changes in the sustainability buffer need to be integrated into APRA Standard for Credit Risk Management.

The Australian Prudential Regulation Authority (APRA) has written to banks asking for their views on its proposal to “formalize and integrate credit-based macroprudential policy measures into its prudential standard for credit risk.

The proposals include a set of credit-based macroprudential measures that could be used to address systemic risks, where appropriate. It would also be necessary Authorized Depository Institutions (ADI) to “preposition in advance to remove potential obstacles to implementation, supporting a rapid response to any emerging risks”.

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

The proposed credit-based macroprudential measures include:

  • ‘Portfolio-level’ credit limits, which could be used to ‘moderate any excessive growth in subprime loans during times of heightened systemic risk’
  • Minimum requirements for “applied at the individual loan level” lending standards, which include measures such as the sustainability buffer for residential mortgages

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

It will force banks to:

  • Ensure they have the capacity to limit growth in particular forms of lending
  • Moderately high risk loans during periods of increased systemic risk or meeting specific lending standards, at levels determined by APRA
  • Ensure that there would be adequate reports in place to monitor limits

Credit limit details

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

  1. Loans with a debt-to-income ratio of four or six times or more
  2. Loans with a loan / appraisal ratio greater than or equal to 80% or 90%
  3. Loans for investment purposes
  4. Interest-only loan
  5. Ready with a combination of two of the types specified in (a) to (d)

Banks must also apply a cushion on the interest rate on a loan to assess a borrower’s servicing capacity of at least 3.0% (as previously announced), but the regulator has said it ” can vary the minimum level of the cushion between 2.0 and 5.0% ”.

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

  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 as determined by APRA, ”the regulator told ADI in a statement. letter Thursday (November 11).

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

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

In addition to loan limits, APRA is also consulting on “a small change in the definition of borrower’s income statement” for the purpose of calculating debt-to-income and loan-to-income ratios (in accordance with the standard of ARS 223 Residential Mortgage Lending statement) to “ensure alignment with the new attachment”.

He proposes to modify the definition of the gross income of a borrower in “the borrower’s annual income before tax verified by an ADI, excluding mandatory pension contributions and before any discount or discount as part of the assessment policy of the borrower. ‘utility of ADI’.

“Change the way in which measures can be applied”

APRA President Wayne Byres stressed that while the proposed changes “do not alter the potential macroprudential tools that APRA can use, nor do they give APRA additional powers,” they “rather alter the how certain measures can 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 within APS 220, APRA’s objective is to strengthen the transparency, implementation and enforceability of macroprudential policy.

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

However, any decision by APRA to implement 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.

Although the standard changes primarily affect banks, APRA suggested that non-banks should also consider the changes because “APRA expects all rules, if introduced for non-ADI lenders. , would likely mirror those set out for ADIs ”in the draft attachment to APS 220.

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

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

Next steps

APRA is now calling for “specific feedback” on any implementation issues that may arise from using the definitions of subprime loans, as noted.

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

From January 1, 2022, ADIs will have 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”, these new requirements coming into force shortly after.

[Related: APRA makes move on home loan buffers]

DTI limits and buffers in APRA’s arsenal for managing credit risk

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Last updated: November 12, 2021

Posted: 11 November 2021

Annie kane

Annie kane

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

In addition to writing about the Australian brokerage industry, mortgage market, financial regulation, fintechs and the broader lending landscape – Annie is also the host of Elite Broker and In Focus podcasts and The Adviser Live webcasts. .

Contact Annie at: This e-mail address is protected from spam. You need JavaScript enabled to view it.

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