Hitting the buffers
Wayne Byres is back baby, this time to embed tools such as debt to income ratios and serviceability buffer changes into the standard for credit risk management, to be utilised more efficiently if required (APS 220).
For residential lending APRA will require that banks have the ability to limit lending for the following loan types:
-loans with a debt to income ratio >4x or >6x
-residential lending with a loan to value ratio of equal to more than 80 per cent, or 90 per cent
-investment loans
-interest-only mortgages
-lending with a combination of two of the above
There may also be small amendments to the definition of borrower incomes, and some equivalent moves on in relation to commercial lending.
The proposal to formalise the measures doesn't change the tools which can't be used, as such, but embedding them in the standard will go some way to changing the timeliness and manner in which they could be applied.
Unintended consequences
I understand the reasoning and desire to constantly tweak or limit lending flows, although I've never agreed with the practices, for all the reasons previously articulated.
By way of just a few examples below, capping debt to income ratios sounds like a reasonable way to reduce risks in the market at face value, but when you think about it in practice the opposite may be true.
After all, isn't the best time to borrow for those with a 30-year home loan mortgage when they have a period of low or limited income, to enable them to smooth their consumption with less risk?
And why shouldn't a prudent, debt-free retiree be allowed to borrow against the appreciated value of their home?
Should student loans also be banned, following this logic?
Is it also a smart idea to block someone from taking out a loan if they lose their business or are made redundant?
Especially now that it seems state governments can shut down entire economies for months at a time, apparently at any moment.
Isn't this (plus the indirect impact on asset prices) actually increasing the risks of default, rather than "mitigating risks to financial stability"?
Unless that is, the regulations were to provide a range of exemptions, which in any case would be a tacit admission that such caps don't make sense.
Logically you can't make a potentially fragile system more resilient or robust through attempting to remove all the stressors from it.
Anyway, I'll be discussing this and other issues on ausbiz TV later this morning...so you can hear me having a whinge over there instead!
