## EXECUTIVE SUMMARY (1ausea2019003)

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---

### Systemic risk oversight
- Institutional arrangement: responsibilities and tools for financial stability are spread across several regulators.
- CFR role:
  - Serves as discussion and information-sharing forum but "has no powers or decision-making responsibilities."
  - Meets formally four times a year; RBA acts as Chair and Secretariat.
- RBA role: "has a mandate for overseeing financial system stability but has few policy levers."
- APRA role:
  - "has a statutory mandate to promote financial stability as it pursues its prudential objectives"; controls the prudential toolkit.
  - APRA is the sole regulator with “macroprudential” powers in the Australian financial system.
- Assessment and recommendation:
  - Historically effective through strong inter-agency cooperation.
  - Recommendation: "a more concrete macroprudential framework should be put in place to strengthen accountability and promote policy action regarding financial stability risks."
- Suggested CFR actions:
  - Publication of CFR views on critical financial stability matters in an annual report, and regular publication by the CFR of a record of its discussions.
  - Enhancement of the stability-monitoring framework and measures of systemic risk.
  - Oversight of a broad cross-agency review of data and methods to strengthen analytical capabilities in financial stability and supervisory policy.

### Macroprudential policy: measures, effectiveness, and gaps
- Measures implemented:
  - Temporary restrictions on investor loans and interest-only mortgage loans.
  - Strengthened serviceability assessments.
  - Increased attention to traditionally higher risk lending (e.g., CRE).
- Effectiveness and stance:
  - Measures "have been effective in reinforcing sound lending practices."
  - "The pace at which household indebtedness is increasing has slowed and house prices have fallen in some areas."
  - "Additional tightening of macroprudential measures does not appear warranted at this time."
- Structural vulnerabilities that persist:
  - "High level of household leverage."
  - "Concentrated bank exposures to real estate markets."
- Recommendation: authorities explore extending their policy toolkit to respond to persistent vulnerabilities.

### Policy options and readiness
- Capital-based cyclical tools:
  - Consider activation of the Counter Cyclical Capital Buffer (CCyB) "or other alternative options for adjusting capital requirements in a cyclical fashion."
  - Rationale: "CCyB builds resilience in the financial system to adverse shocks, helps constrain the growth of credit during cyclical upswings, and can be easily reduced under a lowering of risks."
  - Recommendation: "APRA, supported by the RBA, should continue to refine its CCyB metrics, leveraging new international work in this area."
  - Other options: "time-varying sectoral risk weights adjusted to reflect cyclical variations in risk affecting specific portfolio segments."
- Borrower-based measures:
  - Evidence: "Borrower-based credit constraints have proven effective in constraining credit growth and overall indebtedness in similar economies."
  - Instruments discussed:
    - Caps on loan-to-value (LTV) ratios for residential mortgages.
    - Limits on loan-to-income (LTI) or debt-to-income (DTI) ratios.
    - Complementary measures: "caps under a debt-servicing test or a refinement of the existing net income surplus serviceability test."
  - Recommendation: "authorities should be ready to implement borrower-based measures while sustaining recent emphasis on expanding supervisory oversight ... as well as on improving needed data and analytical methods."
  - Supporting developments: APRA indicated banks should place an increased emphasis on borrower DTI metrics (April 2018); newly introduced DTI bank reporting requirements and the Comprehensive Credit Reporting (CCR) regime will help support the use of such measures.
- Commercial Real Estate (CRE):
  - CRE prices "have risen sharply in recent years."
  - Bank exposures to CRE are "modest," but "the sector is highly cyclical and was the source of large bank losses in the early 1990s."
  - Recommendation: "A set of prudential instruments to address risks that may originate from exposures to the Commercial Real Estate (CRE) sector should be developed."
- Non-ADI space:
  - Non-ADIs: growing market share, "overall market share remains modest at around 5 percent."
  - Recommendation: "APRA draws up advance plans for the use of its recently granted reserve powers in the non-ADI space."

### Institutional and analytical recommendations
- Strengthen CFR transparency and accountability:
  - Publish CFR views and records of discussions; present an Annual Report to parliament by heads of CFR member agencies.
- Enhance stability monitoring and stress-testing:
  - "Strengthen analysis of financial stability risks and stress-testing capabilities of the CFR agencies by improving analytical tools and leveraging the financial stability expertise of the RBA."
- Policy-impact and data reviews:
  - CFR should commission analysis on financial stability implications of policies affecting household leverage.
  - CFR should strengthen analysis of factors affecting international investment flows and their implications for real estate markets and financial stability.
  - CFR should oversee a broad review of data, identifying any gaps, to enhance analytical capabilities in financial stability and supervisory policy.
  - CFR should assess the potential impacts of macroprudential regulatory measures on competition.
- Readiness assessment:
  - Authorities evaluated a wide range of potential actions but "eschewed several options that have been successfully used elsewhere."
  - Recommendation: carry out a ‘readiness’ assessment of potential options to facilitate introduction of new or expanded policy measures, addressing data and legal/regulatory impediments.

### Key recommendations and timing (summary)
- Raise transparency of the CFR and accountability of member agencies; publish records and present an Annual Report to parliament. — I (Immediate, within 1 year)
- Strengthen analysis of financial stability risks and stress-testing capabilities by improving analytical tools and leveraging RBA expertise. — ST (Short term, within 1–2 years)
- CFR to commission analysis on financial stability implications of policies affecting household leverage. — MT (Medium Term, within 3–5 years)
- CFR to strengthen analysis of international investment flows and implications for real estate markets. — I
- CFR to oversee a broad review of data to enhance analytical capabilities. — I
- CFR to assess potential impacts of macroprudential regulatory measures on competition. — I
- CFR to undertake a review of readiness to apply borrower-based and other policies, addressing data and legal/regulatory impediments. — I
- Increase weight on cyclical measures such as the CCyB and explore additional options for cyclical capital adjustments. — I
- Develop prudential instruments for CRE exposures. — I
- Draw up advance plans for APRA’s use of reserve powers in the non-ADI space. — ST

---

### Box 1. Interest-Only Loans

### Overview and features
- Interest-only (IO) loans reached almost 40 percent of total residential mortgages in 2015.
- IO period typically limited to five years, although it can be extended (particularly for investor loans).
- IO features imply:
  - Outstanding principal will be higher compared to a P&I loan over the life of the loan.
  - Aggregate interest costs will be larger.

### Demand drivers and borrower composition
- IO loans attractive to owner-occupiers for repayment flexibility and to investors due to tax deductibility of investment interest and ability to maintain leverage.
- Investors have dominated issuance of new IO loans.

### Financial stability concerns and borrower vulnerability
- Transfer from IO to P&I can produce a step up in payments: mortgage payments can rise by 30 to 40 percent if the borrower switches to principal and interest loans at the end of the IO period.
- Although a small increase in nonperforming loans has been associated with transfers from IO to P&I, overall impact on financial stress has been modest to date.

### Policy and regulatory response
- APRA tightened prudential standards on IO loans, particularly in 2017:
  - Benchmark limiting new IO lending by ADIs to 30 percent of total new residential mortgage lending.
  - Expected ADIs to be especially strict on IO lending where LTV exceeded 80 percent.
  - Emphasized appropriate serviceability metrics and caution on higher risk loan categories.
- Sequence of APRA actions from 2011; key 2014 actions included:
  - Temporary 10 percent benchmark for growth of ADI investor lending.
  - Heightened surveillance on higher risk mortgage lending.
  - Standardized and tightened serviceability assessments with increased emphasis on net income surplus (NIS).
- April 2018: conditional withdrawal of the 10 percent benchmark on investor lending growth where ADIs can show containment and adequate assurances.
- APRA signaled renewed rapid growth in aggregate investor lending could warrant implementation of the “counter-cyclical capital buffer or some other industry-wide measure.”
- APRA indicated ADIs should develop internal portfolio limits on the proportion of new lending at very high DTI levels and limits on maximum DTI levels for individual borrowers.

### Effects of measures and market developments
- 2014 measures slowed growth of investor loans, particularly among ADIs.
- Share of IO loans in new approvals dropped sharply after the 2017 measures for both owner-occupier and investor mortgages.
- Banks increased interest rates on investor and IO loans relative to owner-occupier P&I loans.
- Interest rate buffers in assessments are estimated to reduce maximum loan sizes by around 30 percent, but aggregate impact on credit growth is believed to be modest.
- Residential real estate lending represents about 60 percent of total bank loans after a portfolio shift away from business lending.
- Lenders mortgage insurance (LMI): about one-fifth of housing loans are estimated to be insured.

---

### Box 2. Charter of the Council of Financial Regulators (CFR)

### Purpose and scope
- CFR facilitates cooperation between the Reserve Bank of Australia, APRA, ASIC and The Treasury.
- Objectives: contribute to efficient and effective regulation and to promote stability of the Australian financial system.
- CFR provides a forum for identifying issues that may impinge on financial stability, coordinating responses to financial instability, and harmonising regulatory and reporting requirements.

### Operations and working groups
- CFR meets formally four times a year; RBA sets agenda in liaison with member agencies.
- Working groups include:
  - Housing Market Risk Working Group.
  - Financial Market Infrastructure Crisis Management Working Group (focus on CCPs).
  - Inactive shadow banking working group (RBA delivers annual update).

### Division of responsibilities and systemic roles
- RBA: mandate for financial system stability; responsibilities include monetary policy and maintaining low and stable inflation.
- APRA: controls prudential toolkit; must balance stability with safety, efficiency, competition, contestability, and competitive neutrality.
- ASIC and The Treasury: roles in promoting financial stability.
- APRA communicates regulatory implications but does not typically focus on macrofinancial issues; APRA has sole authority over the CCyB.

### CCyB implementation and international context
- CCyB framework introduced in 2016, consistent with Basel III.
- As of the assessment: the CCyB has not been activated (consecutive decisions have left the buffer at zero).
- APRA published a December 2017 paper describing its decision process for the CCyB and cited reasons for maintaining a zero buffer, including strengthened capital ratios and targeted prudential measures.
- Internationally:
  - Of the 53 countries with established CCyBs, all but 7 have given authority to set the CCyB to the prudential bank regulator.
  - In most comparison countries, stress testing authority rests with the banking regulator.
  - Central banks are often more closely involved in CCyB calibration elsewhere; in all eight countries that had set CCyBs at non-zero levels as of September 2017, the central bank had proposed the actual level.

### Recommendations to enhance macroprudential policy toolkit
- Explore options to extend the toolkit (capital buffers, time-varying risk weights, DTI/DSTI and LTV restrictions, tools for non-ADIs, tools for CRE exposures).
- Conduct a ‘readiness’ assessment addressing data and legal/regulatory obstacles.
- If systemic risks rise, consider activation of the CCyB; APRA, supported by the RBA, should continue refining core indicators.

---

### Borrower-based measures, CRE, stress testing, data, and international experience

### Borrower-based constraints: effectiveness and mechanics
- Caps on LTV ratios:
  - Constrain funding available and screen marginal borrowers.
  - Bolster borrower resilience to house-price shocks and contain lender losses.
  - Limitations: may become less binding as valuations rise; successive tightenings may be necessary.

### Income- and serviceability-based constraints
- LTI and broader DTI:
  - Become more binding when housing prices grow faster than disposable income.
  - Recommendation: limits on the DTI ratio should become a more formal component of the macroprudential toolkit.
- DSTI:
  - Low DSTIs are associated with lower delinquency rates; must be stress tested with higher interest rates.
  - APRA requires interest rate buffers of at least 2 percentage points above the effective variable rate and a minimum floor assessment rate of at least 7 percent.
  - APRA requires haircuts on certain income by at least 20 percent.

### Non-ADI lenders and preparedness
- Non-ADI mortgage lending has grown rapidly from a low base; overall share remains small.
- Government has given APRA reserve powers if non-ADI lending materially contributes to financial instability.
- Recommendation: develop prudential measures and define policy measures applicable to the non-ADI sector if required.

### CRE sector risks and tools
- CRE is susceptible to volatility and adverse spillovers despite bank exposures being moderate.
- Instruments to prepare: sectoral capital requirements, stricter large exposures criteria, stricter lending standards (LTV, debt-service coverage ratio, interest coverage ratio).
- International usage: almost 40 percent of EU members implemented CRE-related macroprudential measures; about 70 percent for residential real estate.

### Stress testing, data, analytics
- Stress testing is essential for macroprudential and prudential supervision; top-down models supplement bottom-up APRA approaches.
- Data sources: HILDA; ABS Survey of Income and Housing; Securitization Database; tax data.
- Securitization Database covers 1.6 million individual mortgages with a total value of around A$400 billion — about one-quarter of the total value of outstanding home loans.
- Recommendation: collect more complete loan-level data to facilitate quantitative analysis of macroprudential measures and track borrower characteristics.

---

### Findings on responsible lending and supervisory timeline

### Responsible lending review findings
- Review found lenders had been falling short of responsible lending obligations in provision of IO loans; all 11 participating lenders agreed to change practices per ASIC’s recommendations.
- ASIC published Report 493 following a review of lending practices of 11 large mortgage brokers (2016).
- April 2017: ASIC findings from review of 8 lenders on inquiry into consumers’ living expenses; project examining whether lenders and brokers recommended IO loans in appropriate circumstances.

### Timeline of APRA measures (selected)
- 2015: APRA requested larger ADIs complete a Hypothetical Borrower Exercise using policies as at December 31, 2014.
- Jul 2015: APRA announced increase in capital adequacy for IRB residential mortgage exposures, effective July 1, 2016, requiring increase of average risk weights to at least 25 percent from about 16 percent (equivalent to increasing minimum capital requirements for major banks by approximately 80 basis points).
- Jan 2016: APRA incorporated the Countercyclical capital buffer into capital standards; the Australian jurisdictional CCyB applying from January 1, 2016 will be zero percent of risk-weighted assets.
- Oct 2016: APRA released for consultation revised draft of APG 223 Residential Mortgage Lending.
- 2016–2018: thematic reviews of commercial property lending and mortgage origination controls.
- Mar 2017: APRA calibrated borrower and portfolio constraints.
- Apr 2018: From July 1, 2018 the 10 percent investment lending growth benchmark will no longer apply where ADI has been operating below it for at least the past six months and provided required Board assurance to APRA.

### APRA restrictions and supervisory expectations (Mar 2017 and Apr 2018)
- Mar 2017 measures:
  - Limit new IO lending to 30 percent of new residential mortgage lending.
  - Strict internal limits on IO lending at LVRs above 80 percent; strong scrutiny for IO at LVR above 90 percent.
  - Investor lending to remain below the 10 percent growth benchmark; exceeding it triggers capital adequacy review.
  - Serviceability metrics, including interest rate and net income buffers, set at appropriate levels.
  - Restraint on lending growth in higher risk segments (high LTI, high LVR, very long-term loans).
- Apr 2018 expectations (where 10 percent benchmark no longer applies for an ADI):
  - Interest rate buffers comfortably above 2 percentage points; interest rate floors comfortably above 7 percent.
  - Apply buffers and floors to both new and existing debt commitments; use conservative proxies where necessary.
  - Income haircuts of at least 20 percent for most types of non-salary income and expected rental income.
  - For IO loans, assess serviceability over the P&I repayment period (i.e., excluding the IO term).
  - Prudently manage overrides to lending policies with Board-set risk tolerances.
  - Develop internal risk appetite limits on proportion of new lending at very high DTI levels (debt greater than six times a borrower’s income) and policy limits on maximum DTI levels for individual borrowers.
- Note: ADIs with IO lending below the 30 percent benchmark are expected to remain below it.

---

### International experience and policy comparisons (selected examples)
- New Zealand (RBNZ) actions:
  - Oct 2013: 10 percent limit on new mortgages at LTVs over 80 percent.
  - 2015: maximum share of loans with LTV>70 percent set at 5 percent for Auckland investors.
  - 2016: extended 10 percent limit nationwide for owner-occupiers at LTV>80 percent; 5 percent limit for investors at LTV>65 percent.
  - 2017: about one-third of borrowers had a DTI of 500 percent or more; RBNZ consulted on DTI introduction.
- Canada:
  - LTV reduced from 100 percent to 95 percent in 2008; in 2016 reduced to 90 percent on the portion of the house price more than C$500,000.
  - LTV cap on investment properties reduced from 95 percent to 80 percent in 2010.
  - Empirical finding: a one percent reduction in the LTV was found to reduce the annual growth of credit by 0.5 percent (Canada context).
- United Kingdom: LTI≥4.5 times income expected to be less than 15 percent of aggregate volume of new loans.
- Sweden: LTV cap of 85 percent since 2010; amortization requirements linked to LTI tightened early 2018.
- Norway: DTI cap with total debt limited to five times the borrower’s gross annual income.
- The Netherlands: LTV reduced to 100 percent in 2018 (from 106 percent in 2012).

---

### Key statistics and numeric points (preserved exactly)
- Total household debt-to-income (DTI) ratio reached "around 190 percent in 2017."
- Household debt-to-income ratio has risen by some 20–25 percentage points since the previous FSAP in 2012.
- Household credit growth: "about 7 percent per annum over the past several years."
- Personal credit represents "only 6 percent of banks’ lending to the household sector."
- Mortgage credit has more than doubled over the past decade.
- Interest-only (IO) loans:
  - IO loans "now represent about 15 percent of the stock of owner-occupier lending, and almost one-half of investor lending."
  - IO loans reached almost 40 percent of total residential mortgages in 2015.
- APRA measures and thresholds:
  - APRA increase of average risk weights to at least 25 percent from about 16 percent (effective July 1, 2016).
  - Equivalent increase in minimum capital requirements for major banks by approximately 80 basis points.
  - Countercyclical capital buffer applying from January 1, 2016 will be zero percent of risk-weighted assets.
  - APRA interest-only new lending cap: 30 percent of new residential mortgage lending.
  - LVR scrutiny thresholds: above 80 percent; above 90 percent.
  - Investor lending benchmark: 10 percent growth.
  - Interest rate buffers: comfortably above 2 percentage points.
  - Interest rate floors: comfortably above 7 percent.
  - Income haircuts: at least 20 percent for most types of non-salary income and expected rental income.
  - Very high debt-to-income threshold: debt greater than six times a borrower’s income.
- Securitization Database: covers 1.6 million individual mortgages with a total value of around A$400 billion — about one-quarter of the total value of outstanding home loans.
- Non-ADI market share: "overall market share remains modest at around 5 percent."

*Source: EXECUTIVE SUMMARY, Box 1, Box 2 and selected sections from the provided IMF Australia country material (1ausea2019003).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Systemic Risk Oversight
- Institutional arrangement: responsibilities and tools for financial stability are spread across several regulators.
- CFR: serves as discussion and information-sharing forum but "has no powers or decision-making responsibilities."
- RBA: "has a mandate for overseeing financial system stability but has few policy levers."
- APRA: "has a statutory mandate to promote financial stability as it pursues its prudential objectives"; controls the prudential toolkit.
- Assessment of current arrangements:
  - Historically worked well based on strong inter-agency cooperation.
  - Recommendation: "a more concrete macroprudential framework should be put in place to strengthen accountability and promote policy action regarding financial stability risks."
- Recommended CFR actions (as presented):
  1. "Publication of CFR views on critical financial stability matters in an annual report, and regular publication by the CFR of a record of its discussions."
  2. "Enhancement of the stability-monitoring framework and measures of systemic risk."
  3. "Oversight of a broad cross-agency review of data and methods to strengthen analytical capabilities in the areas of financial stability and supervisory policy."

### Macroprudential Policy: measures, effectiveness, and gaps
- Measures implemented:
  - "Temporary restrictions on investor loans and interest-only mortgage loans."
  - Strengthened "serviceability assessments."
  - Increased attention to traditionally higher risk lending (e.g., CRE).
- Effectiveness and current stance:
  - Measures "have been effective in reinforcing sound lending practices."
  - "The pace at which household indebtedness is increasing has slowed and house prices have fallen in some areas."
  - "Additional tightening of macroprudential measures does not appear warranted at this time."
- Structural vulnerabilities that persist:
  - "High level of household leverage."
  - "Concentrated bank exposures to real estate markets."
  - Recommendation: "authorities explore extending their policy toolkit to respond to them."

### Specific vulnerabilities in household and real estate sectors
- Household indebtedness:
  - Total household debt-to-income (DTI) ratio reached "around 190 percent in 2017."
  - "Household debt-to-income ratio has risen by some 20–25 percentage points since the previous FSAP in 2012."
  - Household credit growth: "about 7 percent per annum over the past several years."
  - Personal credit represents "only 6 percent of banks’ lending to the household sector."
- Mortgage and housing market dynamics:
  - Mortgage credit "has more than doubled over the past decade."
  - Investor housing debt has been a significant component; rising proportion of taxpayers owning investment properties.
  - Drivers of house price increases: "low-interest-rate environment," population growth, strong investor appetite (foreign and domestic).
  - Risk from variable-rate mortgages if interest rates rise.
- Interest-only (IO) loans:
  - IO loans "now represent about 15 percent of the stock of owner-occupier lending, and almost one-half of investor lending."
  - Concerns: IO loans "lead to a higher average indebtedness over the life of the mortgage relative to a comparable principal-and-interest (P&I) loan."
  - Investors: relatively large share of loans with current LTVs of "75 percent to 80 percent."
  - Risk: investors "may be more inclined to sell real estate assets in the face of financial hardship, adding to the downward pressure in the event of an economic downturn."

### Policy options and readiness
- Capital-based cyclical tools:
  - Consider activation of the Counter Cyclical Capital Buffer (CCyB) "or other alternative options for adjusting capital requirements in a cyclical fashion."
  - Rationale: "CCyB builds resilience in the financial system to adverse shocks, helps constrain the growth of credit during cyclical upswings, and can be easily reduced under a lowering of risks."
  - Recommendation: "APRA, supported by the RBA, should continue to refine its CCyB metrics, leveraging new international work in this area."
  - Other options: "time-varying sectoral risk weights adjusted to reflect cyclical variations in risk affecting specific portfolio segments."
- Borrower-based measures:
  - Evidence: "Borrower-based credit constraints have proven effective in constraining credit growth and overall indebtedness in similar economies."
  - Instruments discussed:
    - Caps on loan-to-value (LTV) ratios for residential mortgages.
    - Limits on loan-to-income (LTI) or debt-to-income (DTI) ratios.
    - Complementary measures: "caps under a debt-servicing test or a refinement of the existing net income surplus serviceability test."
  - Recommendation: "authorities should be ready to implement borrower-based measures while sustaining recent emphasis on expanding supervisory oversight ... as well as on improving needed data and analytical methods."
  - Supporting developments: "APRA ... indicated that banks should place an increased emphasis on borrower DTI metrics" (April 2018); "Newly introduced DTI bank reporting requirements and the Comprehensive Credit Reporting (CCR) regime will help support the use of such measures."
- Commercial Real Estate (CRE):
  - CRE prices "have risen sharply in recent years."
  - Bank exposures to CRE are "modest," but "the sector is highly cyclical and was the source of large bank losses in the early 1990s."
  - Recommendation: "A set of prudential instruments to address risks that may originate from exposures to the Commercial Real Estate (CRE) sector should be developed."
- Non-ADI (non-Authorized Deposit-taking Institution) space:
  - Non-ADIs: growing market share, "overall market share remains modest at around 5 percent."
  - Recommendation: "APRA draws up advance plans for the use of its recently granted reserve powers in the non-ADI space."
  - Note: "this is a relatively untested area of regulation that will require careful consideration of costs and benefits prior to any action."

### Institutional and analytical recommendations
- Strengthen CFR transparency and accountability:
  - Publish CFR views and records of discussions; present an Annual Report to parliament by heads of CFR member agencies.
- Enhance stability monitoring and stress-testing:
  - "Strengthen analysis of financial stability risks and stress-testing capabilities of the CFR agencies by improving analytical tools and leveraging the financial stability expertise of the RBA."
- Policy-impact and data reviews:
  - "The CFR should commission analysis by the member agencies on the financial stability implications of policies affecting household leverage."
  - "The CFR should strengthen analysis of factors affecting international investment flows and their implications for real estate markets and financial stability."
  - "The CFR should oversee a broad review of data, identifying any gaps, in order to enhance analytical capabilities in the areas of financial stability and supervisory policy."
  - "The CFR should assess the potential impacts of macroprudential regulatory measures on competition."
- Readiness assessment:
  - "The authorities evaluated a wide range of potential actions ... However, in doing so, they eschewed several options that have been successfully used elsewhere."
  - Recommendation: "carry out a ‘readiness’ assessment of potential options that would facilitate the introduction of new or expanded policy measures, if needed."

### Key recommendations and timing (summary of Table 1)
- Raise transparency of the CFR and accountability of member agencies; publish records and present an Annual Report to parliament. — I (Immediate, within 1 year)
- Strengthen analysis of financial stability risks and stress-testing capabilities by improving analytical tools and leveraging RBA expertise. — ST (Short term, within 1–2 years)
- CFR to commission analysis on financial stability implications of policies affecting household leverage. — MT (Medium Term, within 3–5 years)
- CFR to strengthen analysis of international investment flows and implications for real estate markets. — I
- CFR to oversee a broad review of data to enhance analytical capabilities. — I
- CFR to assess potential impacts of macroprudential regulatory measures on competition. — I
- CFR to undertake a review of readiness to apply borrower-based and other policies, addressing data and legal/regulatory impediments. — I
- Increase weight on cyclical measures such as the CCyB and explore additional options for cyclical capital adjustments. — I
- Develop prudential instruments for CRE exposures. — I
- Draw up advance plans for APRA’s use of reserve powers in the non-ADI space. — ST

*Source: EXECUTIVE SUMMARY, Australia Financial Sector Assessment (selected pages).*

### Box 1. Interest-Only Loans

### Box 1. Interest-Only Loans

### Overview and features of IO loans
- Interest-only (IO) loans reached almost 40 percent of total residential mortgages in 2015.
- In a P&I loan, the principal is paid off over the entire life of the loan. In an IO loan, principal is not paid during the first years of the loan (the period without principal payments is typically limited to five years, although it can be extended; particularly in the case of investor loans).
- As a result of IO features:
  - The outstanding principal will be higher compared to a P&I loan over the life of the loan.
  - The aggregate interest costs will be larger.

### Demand drivers and borrower composition
- IO loans are attractive to owner-occupiers for repayment flexibility.
- IO loans are particularly attractive to investors due to the tax deductibility of investment interest expenses and the ability to maintain leverage.
- Investors have dominated the issuance of new IO loans.

### Financial stability concerns and borrower vulnerability
- IO loan balances are higher compared to P&I loans over the life of the mortgage, leaving borrowers more exposed to adverse developments.
- Some borrowers may be vulnerable to an increase in servicing costs when an IO loan is transferred into a P&I loan at the end of five years (serviceability assessments at origination help mitigate this).
- The transfer from IO to P&I loans can produce a step up in payments: mortgage payments can rise by 30 to 40 percent if the borrower switches to principal and interest loans at the end of the IO period.
- Although a small increase in nonperforming loans has been associated with transfers from IO to P&I, overall impact on financial stress has been modest to date.

### Policy and regulatory response
- APRA has tightened prudential standards on IO loans, particularly in 2017, with a benchmark limiting new IO lending by ADIs to 30 percent of total new residential mortgage lending.
- APRA took a sequence of measures beginning in 2011 to reinforce robust lending standards; key actions in 2014 included:
  - A temporary 10 percent benchmark for the growth of ADI investor lending.
  - Heightened surveillance on higher risk mortgage lending (especially IO loans).
  - Standardized and tightened serviceability assessments, with increased emphasis on net income surplus (NIS) over DSTI measures.
- In 2017 APRA:
  - Announced the 30 percent limit on new IO lending by ADIs.
  - Expected ADIs to be especially strict on IO lending where LTV exceeded 80 percent.
  - Emphasized appropriate serviceability metrics and caution on higher risk loan categories.
- ASIC reinforced measures to ensure compliance with responsible lending practices, particularly relating to IO lending.
- In April 2018 APRA announced a conditional withdrawal of the 10 percent benchmark on investor lending growth introduced in 2014; the benchmark will cease to apply on a specific ADI when it can show containment of investor loan growth and adequate assurances on lending standards.
- APRA indicated that renewed rapid growth in aggregate investor lending could warrant implementation of the “counter-cyclical capital buffer or some other industry-wide measure.”
- APRA indicated ADIs should develop:
  - Internal portfolio limits on the proportion of new lending at very high debt-to-income (DTI) levels.
  - Limits on maximum DTI levels for individual borrowers.

### Effects of measures and market developments
- The 2014 measures slowed growth of investor loans, particularly among ADIs.
- The share of IO loans in new approvals dropped sharply after the 2017 measures for both owner-occupier and investor mortgages.
- Banks increased interest rates on investor and IO loans relative to owner-occupier P&I loans.
- Strengthened serviceability assessments helped underpin lending quality; interest rate buffers in assessments are estimated to reduce maximum loan sizes by around 30 percent, but aggregate impact on credit growth is believed to be modest.
- Growth in offset account balances has slowed somewhat.
- The pace of growth in house prices has moderated and prices have fallen back a little recently, though they remain high.
- Pace of household indebtedness growth has slowed and is expected to stabilize at about current levels per the IMF 2017 Article IV outlook.

### Related financial-sector context and vulnerabilities
- Residential real estate lending represents about 60 percent of total bank loans after a substantial portfolio shift away from business lending.
- Lenders mortgage insurance (LMI):
  - Is typically used where the mortgage has an LTV ratio of 80 percent or higher.
  - About one-fifth of housing loans are estimated to be insured.
  - LMI providers face highly correlated risks and are prudentially regulated by APRA (ring-fenced and required to hold robust capital).
- Commercial real estate (CRE) exposures are just over 10 percent of bank loans; CRE is more volatile and historically a source of substantial losses during stress.
- Prices for several key categories of commercial property have risen sharply; yields have fallen and foreign banks’ share of new commercial property lending has more than doubled over the past several years to 14 percent.
- The banking sector remains highly profitable with high total return-on-equity and very low nonperforming loans, but increased concentration in residential mortgage lending raises system-wide exposure to real estate turbulence.
- Stress tests using an adverse scenario found major banks would experience large credit losses and significant reductions in capital levels, although CET1 remained above regulatory thresholds.
- Wholesale funding remains around one-third of total funding, of which nearly two-thirds is from international sources, creating rollover and funding risks.
- Non-ADI mortgage lenders have experienced rapid growth (from a small base); the non-ADI sector is regulated by ASIC under the National Consumer Credit Protection Act 2009 but is less closely monitored than banks.
- The government has given APRA a new reserve power to be used should non-ADI lenders materially contribute to financial instability risks; APRA’s data collection powers on non-ADIs have been strengthened.

*_Source: Box 1. Interest-Only Loans (from the provided IMF Australia country material)._*

### Box 2. Charter of the Council of Financial Regulators

### Box 2. Charter of the Council of Financial Regulators

### Purpose and forum
- The Council of Financial Regulators (CFR) aims to facilitate cooperation and collaboration between the Reserve Bank of Australia, the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission and The Treasury.
- Ultimate objectives: contribute to the efficiency and effectiveness of regulation and to promote stability of the Australian financial system.
- The CFR provides a forum for:
  - identifying important issues and trends in the financial system, including those that may impinge upon overall financial stability;
  - ensuring the existence of appropriate coordination arrangements for responding to actual or potential instances of financial instability, and helping to resolve any issues where members' responsibilities overlap; and
  - harmonising regulatory and reporting requirements, paying close attention to the need to keep regulatory costs to a minimum.

### Scope, topics discussed, and limits of the charter
- The charter does not explicitly include the following topics, although these have been discussed at the CFR:
  - Tracking systemic risk or considering the systemic impact of major regulatory actions;
  - Using policy tools or other methods to address systemic risks; and
  - Identifying significant data gaps or data-sharing issues across the regulators.

### CFR operations, meetings, and working groups
- The CFR meets formally four times a year, but members engage in ongoing dialogue on a broad range of topics.
- The RBA, as Chair and Secretariat, has the responsibility for setting the agenda, in close liaison and coordination with each member agency, and also with non-members when they are attending meetings.
- Typical agenda mix: standing items (e.g., discussion of recent market and regulatory developments), work carried over from previous meetings, and new items raised by one or more member agencies.
- Working groups organized under the auspices of the CFR discuss a broad range of financial stability relevant issues, for example:
  - The Housing Market Risk Working Group: “providing analysis of developments in the housing market and industry responses to the recent regulatory measures.”
  - The Financial Market Infrastructure (FMI) Crisis Management Working Group: working on a resolution framework for FMIs, with a focus on CCPs; plans are to send drafting instructions for legislation in 2019.
  - A currently inactive working group on shadow banking considered the implementation of FSB shadow banking recommendations; the RBA delivers an annual update to the members of the CFR on this topic.
- Information sharing has been active, although some data sharing across all agencies has been restricted due to legal issues and confidentiality concerns (examples: bank-level data from prudential regulators and the securitization database).

### Division of responsibilities and systemic roles
- Responsibilities and tools for safeguarding financial stability are spread across several regulatory agencies:
  - The RBA has a mandate for overseeing financial system stability but has no direct regulatory policy levers outside the payments system; responsibilities include monetary policy and maintaining low and stable inflation and sustainable economic growth.
  - APRA controls the prudential toolkit and must balance financial stability objectives against financial safety and efficiency, competition, contestability, and competitive neutrality.
  - ASIC and the Treasury also have roles in promoting financial stability.
- Published division of responsibilities for financial stability policy (RBA and APRA 2012):
  - The RBA: longstanding responsibility for financial stability reconfirmed in 1998 reforms and outlined in the September 2010 Statement on the Conduct of Monetary Policy.
  - APRA: under the APRA Act, required to promote financial system stability in Australia while balancing objectives of financial safety and efficiency, competition, contestability and competitive neutrality; Banking Act states duty to exercise powers for the protection of depositors and for the promotion of financial system stability in Australia.
  - ASIC: responsible for taking certain regulatory actions to minimize systemic risk in clearing and settlement systems, working with the RBA.
  - The Australian Treasury: responsible for advising the government on financial stability issues and on the legislative and regulatory framework underpinning financial system infrastructure.

### Stress testing and macroprudential authority
- Stress testing: close collaboration between APRA and the RBA; APRA and the RBA develop stress scenarios, which are passed to banks to run; RBNZ consulted as appropriate given Australian banks' role in New Zealand; results shared by APRA with RBA for macroeconomic and stability analyses.
- APRA is the sole regulator with “macroprudential” powers in the Australian financial system:
  - Quoted: “The main tools for macroprudential supervision in Australia are only exercisable by APRA. APRA is the only agency which has power to act to directly change the behavior (and if necessary, the balance sheets) of entities to achieve macroprudential outcomes. The main tool that APRA exercises is to vary through the cycle the intensity of supervision, backed up as appropriate by APRA’s prudential tools (particularly capital) and, in extreme cases, its direction powers.”
- APRA communicates implications and effects of significant regulatory actions but does not typically focus on macrofinancial issues (example: discussed impact on overall credit growth from housing measures but not typically their effect on housing prices).
- APRA has sole authority over the Counter-Cyclical Capital Buffer (CCyB), introduced in 2016; a variety of inputs are considered, including an identified set of core indicators (developed in consultation with the RBA) for the financial cycle that are regularly updated. Final decision involves significant judgment; APRA presents views to the CFR for consultation but the CCyB level decision is APRA’s alone.
- APRA has recently been given powers over non-ADI lending, including enhanced powers to collect data on a wider range of nonbank lenders and reserve powers to address risks from nonbanks if they threaten systemic stability.

### CCyB implementation, international context, and alternatives
- The CCyB framework introduced in 2016 is consistent with Basel III standards and is expressly designed to counter procyclicality in the financial system.
- The CCyB can be activated to require banks to hold additional capital during periods of rising systemic risk and can be released if the financial system comes under pressure or if systemic risks diminish.
- As of the assessment:
  - The CCyB has not been activated (consecutive decisions have left the buffer at zero).
  - In December of 2017 APRA published a paper describing its decision process for the CCyB (APRA 2017); key component includes “forward looking judgements” around a set of core indicators and evidence of financial stress.
  - APRA’s rationale for maintaining the buffer at zero: “The decision to maintain the buffer at zero takes into account the continued strengthening of capital ratios within the banking system, as well as APRA’s other supervisory activities and prudential measures targeting property-related risks, particularly on housing lending standards and the establishment of benchmarks on investor lending growth and interest-only lending. A targeted response that focuses on specific risks has the additional benefit of not impacting credit to other sectors.” (APRA 2017, p. 4).
- International comparisons:
  - Of the 53 countries globally that have established CCyBs, all but 7 have given the authority to set the CCyB to the prudential bank regulator (in 30 of these cases the prudential regulator is the central bank) (Edge and Liang 2017).
  - For stress tests, in 51 out of 57 comparison countries the stress testing authority rests with the banking regulator (in 33 cases the banking regulator is also the central bank).
  - Internationally, central banks are often more closely involved in calibration of the CCyB than in Australia; as of September 2017, in all eight countries that had set their CCyB buffers at a non-zero level, the central bank had proposed the actual level, even though final authority rested with it in three cases.
- Alternatives and refinements:
  - Consider time-varying risk weights adjusted to reflect cyclical variations in risk affecting specific portfolio segments; advantage: better targeting of sectoral risks if good knowledge exists of where risk lies; drawback: greater likelihood of leakages when sectoral tools are used.
  - APRA has continued to refine the capital framework with consultation papers in 2018, including proposals to address concentration in residential mortgage lending by raising capital requirements on targeted areas of higher risk lending and to improve transparency, comparability and flexibility of the ADI capital framework. These refinements are not intended to further increase the overall quantum of capital.

### Recommendations to enhance the macroprudential policy toolkit
- Explore options for further extending the macroprudential toolkit to provide additional flexibility in responding to significant shocks and reduce systemic vulnerabilities, drawing on international evidence.
- Conduct a ‘readiness’ assessment to facilitate introduction of new or expanded policy measures when required, addressing data requirements and legal or regulatory obstacles.
- Priorities for review include:
  - capital buffers and time-varying risk weights;
  - DTI/DSTI and LTV restrictions;
  - tools to address risks from non-ADIs; and
  - tools to address risks from highly cyclical CRE exposures.
- If systemic risks rise, authorities should consider activation of the CCyB to buttress financial system resilience; if activated and risks subsequently diminish, the buffer can be reduced in a timely fashion to lower cost-burden on banks.
- APRA, supported by the RBA, should continue to refine its core indicators, drawing upon international work; while the final decision rests with APRA, the RBA’s input on the evolution of systemic risk is a key element in CCyB activation decisions.

*Source: Box 2. Charter of the Council of Financial Regulators.*

### 51.      Other advanced economies with similar vulnerabilities to those of Australia have

### 1ausea2019003 - 51.      Other advanced economies with similar vulnerabilities to those of Australia have

### Borrower-based credit constraints: effectiveness and mechanics
- Cross-country studies and practical experience show borrower-based constraints can dampen credit growth and house prices (see Annex II).
- Caps on LTV ratios:
  - Commonly used, especially for residential mortgages.
  - Constrain funding available to borrowers and screen marginal borrowers out of the market.
  - Reduce housing demand, credit and house price growth, and procyclical feedbacks between credit and asset prices.
  - Bolster borrower resilience to house-price shocks and contain potential lender losses.
- Limitations of LTV caps:
  - May become less binding when house prices (valuations) increase, especially in strong cyclical upswings.
  - Successive tightenings of the cap may be necessary to maintain the same constraint.

### Income- and serviceability-based constraints (LTI, DTI, DSTI)
- Income-based ratios:
  - LTI and broader DTI share some transmission channels with LTV.
  - Become more binding when housing prices grow faster than households’ disposable income — an automatic stabilizer that helps smooth credit booms.
- Debt-service-to-income (DSTI):
  - Low DSTIs are associated with lower delinquency rates and enhance borrower resilience.
  - Concern: during periods of cyclically low interest rates, DSTI may be low while borrowers remain vulnerable to rising rates.
  - Mitigation: assess borrowers at a higher interest rate by adding an interest rate buffer to serviceability assessments.
- Australian practice and data:
  - Australian lenders implement serviceability assessments and have emphasized the NIS, which incorporates a broader range of household expenses.
  - APRA has standardized minimum interest rate buffers and floor assumptions, and requires haircuts on income from certain less reliable sources (such as bonuses, overtime or rental income by at least 20 percent).
  - APRA indicated banks should place an increased emphasis on borrower DTI metrics (April 2018).
  - Banks are required to submit borrower DTI information in the new data reporting standard (ARF223).
- Recommendation:
  - Limits on the DTI ratio should become a more formal component of the macroprudential toolkit so the DTI can be introduced quickly if risks to financial stability mount.
  - DTIs tend to retain effectiveness longer than LTVs as prices rise relative to incomes.
  - Establishing broad-based DTI requirements is analytically and operationally challenging and requires good borrower-based data; authorities should prioritize collecting relevant data.
  - The introduction over 2018 and 2019 of the Comprehensive Credit Reporting (CCR) regime will provide richer lender data to support use of such measures.
- Complementary DSTI caps:
  - The authorities may consider complementing a DTI with caps on a broad-based DSTI ratio to address high household indebtedness.
  - DSTI assessments must be stress tested with higher interest rates to promote borrower resilience.
  - APRA requires interest rate buffers of at least 2 percentage points above the effective variable rate for the loan term, and a minimum floor assessment rate of at least 7 percent.
  - Setting a clear DSTI limit during rising systemic risk would formalize the DSTI’s application to lending decisions.

### Non-ADI lenders and macroprudential preparedness
- Non-ADI mortgage lending has grown rapidly from a low base, increasing their share of mortgage lending though the share remains small.
- Views differ on non-ADI capacity to continue growth; funding constraints may limit growth, but there is investor interest in successful non-ADI firms.
- Government has given APRA new reserve powers should non-ADI lending materially contribute to financial instability.
- APRA has strengthened surveillance of the non-ADI sector under new data-collection powers.
- Recommendation:
  - Develop a set of prudential measures for potential future application to non-ADI lenders if their contribution to systemic risk rises materially.
  - APRA should define policy measures applicable to the non-ADI sector in case they are required.
  - ASIC is improving capacity via increased contact with non-ADI firms and collecting more information.

### Commercial real estate (CRE) sector risks and tools
- CRE susceptibility:
  - CRE is susceptible to volatility due to rapid price increases in some areas and potential rapid investor behavior changes as conditions change.
  - Bank exposures to CRE have declined relative to other portfolio segments, but adverse spillovers remain possible from sharp market corrections.
- Instruments to address CRE risks:
  - Develop a set of instruments for prompt implementation if CRE concerns mount.
  - International usage: almost 40 percent of EU members implemented CRE-related macroprudential measures (ESRB); about 70 percent for residential real estate.
  - Possible instruments: sectoral capital requirements, stricter large exposures criteria, stricter lending standards (limits on LTVs, debt-service coverage ratio, interest coverage ratio).
  - Some measures were discussed in APRA’s 2016 thematic review, though no limits were imposed; they could be considered in a proposed ‘readiness assessment.’

### Stress testing, data, and analytics
- Stress testing:
  - Evolved into an essential macroprudential and prudential supervision tool to assess banking system resiliency under adverse economic and financial scenarios.
  - Can evaluate additional feedback effects (counterparty risk, asset fire sales).
  - RBA is developing a top-down model to supplement APRA’s bottom-up approach.
  - Top-down models, enhanced with satellite models, can support analysis and evaluation of macroprudential options.
  - Authorities should integrate stress testing more closely with policy analysis and expand data collection to support analytic and modeling efforts.
- Data needs:
  - Comprehensive and timely data are critical to evaluate macroprudential impacts and understand risk distribution within aggregate categories.
  - RBA uses datasets such as HILDA and ABS Survey of Income and Housing, the Securitization Database, and tax data.
  - HILDA and RBA analysis findings:
    - HILDA collects owner-occupier mortgage debt every year and a detailed breakdown of total household debt every four years (most recently in 2014).
    - RBA studied households with high DTI ratios (top 10 percent): most owner-occupiers in this group had a DTI above 550 percent, accounting for 35–40 percent of total debt; a significant share was investor housing debt.
  - Securitization Database:
    - Collects data on mortgages in approximately 280 “pools” with monthly frequency.
    - Covers 1.6 million individual mortgages with a total value of around A$400 billion — about one-quarter of the total value of outstanding home loans.
    - RBA is constrained from sharing this data with other authorities due to legal considerations.
  - Comprehensive Credit Reporting regime will provide richer data for financial institutions.
  - Recommendation:
    - More complete loan-level data would facilitate quantitative analysis of macroprudential measures’ impact and allow detailed tracking of borrower characteristics and household vulnerabilities.

### Strengthening institutional arrangements and CFR recommendations
- Transparency and formalization:
  - Greater transparency about CFR work and formalization of risk identification and analysis should align systemic analysis with prudential actions and increase willingness/ability to address systemic issues.
- Publications and reporting:
  - CFR should regularly publish views of its member agencies on critical financial stability matters, e.g., in an annual report that highlights significant risks and steps to address them; could be tabled and presented to parliament by CFR agency heads.
  - Such reporting would not substitute for the RBA’s FSR but would be a short document summarizing member agencies’ views, emerging risks, data gaps, and actions.
  - CFR should publish a record of its meetings to increase transparency while preserving regulators’ ability for open discourse.
- Monitoring, metrics, and coordination:
  - CFR should develop and publish a series of metrics to track systemic risk and key vulnerabilities, recognizing metrics may need augmentation by case-specific analysis; these metrics would assist in measuring changes over time and in calibrating prudential measures.
  - CFR should oversee a broad review of data to enhance analytical capabilities for financial stability and supervisory policy and coordinate the effort across agencies.
- Policy implications and coordination:
  - CFR member agencies should bring more financial stability–relevant policy analyses to the Council to understand systemic implications and coordinate responses.
  - Specific recommendations:
    - Commission analysis on financial stability implications of policies affecting household leverage (e.g., tax settings such as capital gains tax discounts and unlimited negative gearing) and interactions with prudential settings, mortgage servicing risks, and affordability metrics.
    - Strengthen analysis of international investment flow factors and implications for real estate markets and financial stability; consider Commonwealth and state measures (limits on sales to foreign investors, withdrawal of primary residency exemption from capital gains tax for non-resident investors, stamp duty surcharges, land tax surcharges) when assessing housing market prospects.
    - Assess potential macroprudential measures’ impacts on competition, given possible wide-ranging market consequences and feedbacks to financial stability (e.g., repricing following limits on investor and interest-only lending).

• Annex I (selected prudential policy measures, 2014–18):
  - Dec 2014 APRA: Prudential Practice Guide (APG223) expectations included:
    - Speed limit curtailing annual growth in a bank's investor housing lending to 10 percent;
    - Serviceability assessments to include interest rate buffers of at least 2 percentage points above the effective variable rate and a minimum floor assessment rate of at least 7 percent;
    - Supervisory alertness to high levels of higher-risk mortgage lending with high LVR and/or loan-to-income ratio and owner-occupier loans with lengthy interest-only periods.
  - Dec 2014 ASIC: commenced a review of interest-only home loans and published Report.

*AUSTRALIA INTERNATIONAL MONETARY FUND*

### 445. The review found lenders had been falling short of their responsible

### 1ausea2019003 - 445. The review found lenders had been falling short of their responsible

### Findings on responsible lending and reviews
- The review found lenders had been falling short of their responsible lending obligations in the provision of interest-only loans and all 11 participating lenders agreed to change their practices in line with ASIC’s recommendations.
- ASIC published Report 493 following a review of the lending practices of 11 large mortgage brokers intended to promote responsible lending and consumer confidence in the credit industry (2016).
- Apr 2017 ASIC announced findings of a review of practices at 8 lenders in relation to inquiring into consumers’ living expenses when assessing their capacity to make repayments, and commenced a project to examine whether lenders and mortgage brokers were recommending interest-only loans in appropriate circumstances.

### Timeline of APRA measures and supervisory reviews (selected)
- 2015: APRA requested larger ADIs to complete a Hypothetical Borrower Exercise (HBE) using policies in place as at December 31, 2014, assessing four hypothetical mortgage borrowers—two owner-occupiers and two investors.
- Late 2015: In a second HBE, ADIs that were the least conservative in December 2014 generally reported a significant drop in calculated net income surplus using their September 2015 policies.
- Jul 2015: APRA announced an increase in capital adequacy requirements for residential mortgage exposures for ADIs accredited to use the IRB approach, effective from July 1, 2016, requiring an increase of average risk weights to at least 25 percent from about 16 percent, equivalent to increasing minimum capital requirements for major banks by approximately 80 basis points.
- Jan 2016: APRA incorporated the Countercyclical capital buffer (Basel III) into capital standards for locally incorporated ADIs; the Australian jurisdictional countercyclical capital buffer applying from January 1, 2016 will be zero percent of risk-weighted assets.
- Oct 2016: APRA released for consultation a revised draft of Prudential Practice Guide APG 223 Residential Mortgage Lending.
- 2016: APRA conducted a thematic review of commercial property lending; APRA and ASIC conducted targeted and thematic reviews of mortgage origination controls across Large and Small ADIs (2017, 2018).
- Mar 2017 APRA calibrated borrower and portfolio constraints (see section below).
- Apr 2018 APRA: From July 1, 2018 the 10 percent investment lending growth benchmark will no longer apply where an ADI has been operating below it for at least the past six months and the ADI’s Board has provided required assurance to APRA.

### APRA restrictions and supervisory expectations (Mar 2017 and Apr 2018 details)
- Mar 2017 APRA measures:
  - Limit the flow of new interest-only lending to 30 percent of new residential mortgage lending, and within that:
    - Strict internal limits on the volume of interest-only lending at loan-to-valuation ratios (LVRs) above 80 percent; and
    - Strong scrutiny and justification of any instances of interest-only lending at an LVR above 90 percent;
  - Lending to investors to comfortably remain below the benchmark of 10 percent growth (first introduced in 2014). An ADI operating in excess of this level will prompt an immediate review of the adequacy of the ADI’s capital requirements;
  - Serviceability metrics, including interest rate and net income buffers, to be set at appropriate levels for current conditions;
  - Lending growth in higher risk segments of the portfolio, e.g., high LTI loans, high LVR loans and very long-term loans, continue to be restrained.
- Apr 2018 APRA expectations and policy elements (applicable where the 10 percent investment lending growth benchmark no longer applies per conditions):
  - Interest rate buffers comfortably above 2 percentage points over the loan product rate, and interest rate floors comfortably above 7 percent;
  - Application of these interest rate buffers and floors to both a borrower’s new and existing debt commitments, with sufficiently conservative proxies used where necessary;
  - Discounts on uncertain and variable income, with haircuts of at least 20 percent for most types of non-salary income and expected rental income;
  - For interest-only loans, an assessment of serviceability for the period over which the principal and interest repayments apply (i.e., excluding the interest-only term);
  - Prudently managing overrides to lending policies, with risk tolerances set by the Board on the extent of exceptions to serviceability policy (negative serviceability) and serviceability verification waivers;
  - Developing internal risk appetite limits on the proportion of new lending at very high debt to income levels (where debt is greater than six times a borrower’s income), and policy limits on maximum debt to income levels for individual borrowers.
- Note: ADIs with levels of interest-only loans below the 30 percent benchmark are expected to remain below it and not increase the share of new interest-only loans materially from current levels.

### International experience with borrower-based measures (Annex II) — findings and examples
- General finding: LTV, LTI, DTI, and DSTI ratios have been used internationally as borrower-based macroprudential constraints to enhance household resilience and dampen feedback between credit growth and house price inflation.
- IMF 2014 and subsequent studies (Cerutti, et. al., 2017; Richter, et. al., 2018) find caps on LTV and DTI ratios are very effective in restraining credit growth, especially household credit, and changes in maximum LTV ratios have substantial effects on credit and house price growth.
- New Zealand (RBNZ):
  - Oct 2013: exposure limit on high LTV lending—restrict flow of new mortgages at LTVs over 80 percent to no more than 10 percent of total residential mortgage lending.
  - 2015: tightened requirements for residential property investors in Auckland—maximum share of loans with LTV>70 percent set at 5 percent.
  - 2016: extended 10 percent limit for loans at LTVs greater than 80 percent nationwide for owner-occupiers; for residential property investors, a 5 percent limit for new lending at LTVs greater than 65 percent.
  - 2017: about one-third of borrowers had a DTI of 500 percent or more; RBNZ initiated consultation on introducing a DTI or similar instrument.
- Canada:
  - LTV limits reduced from 100 percent to 95 percent in 2008, and in 2016 to 90 percent on the portion of the house price more than C$500,000.
  - LTV cap on investment properties reduced from 95 percent to 80 percent in 2010.
  - LTV cap on mortgage re-financings reduced from 95 to 80 percent over a period of three years beginning in 2010.
  - Cap on total debt service-to-income introduced in 2008 and tightened in 2012.
  - Empirical finding cited: a one percent reduction in the LTV was found to reduce the annual growth of credit by 0.5 percent (Canada context).
- European Union and other countries:
  - About two-thirds of EU members have implemented restrictions on LTVs (as of Q4 2017).
  - United Kingdom: implemented an LTI (rather than LTV) with new residential mortgage loans with LTI≥4.5 times income expected to be less than 15 percent of aggregate volume of new loans.
  - Sweden: LTV cap of 85 percent in place since 2010; amortization requirements linked to LTI tightened, most recently early 2018.
  - The Netherlands: LTV gradually reduced to 100 percent in 2018 (from 106 percent in 2012); LTI/DSTI limits introduced in 2012 and gradually tightened.
  - Norway: LTV cap of 85 percent since 2010; supplementary LTV cap of 60 percent for secondary homes in Oslo; introduced a DTI cap with total debt limited to five times the borrower’s gross annual income.

### Annex III — Taxation of residential real estate (principal elements)
- Negative Gearing:
  - Allows investors to apply their net loss against other income as a deduction with no total ceiling of the deduction; unused losses are carried forward to the next income year.
  - A rental property is negatively geared where deductible expenses (including depreciation and interest on the loan) exceed income earned from the property.
- Capital Gains Tax Discount:
  - Capital gains tax applies to assets acquired after September 20, 1985 (with exemption for the principal place of residence).
  - Provided the asset has been held for more than one year a 50 percent discount is applied to the realized capital gain which is not included in taxable income.
- Land or Property Tax:
  - States collect land tax usually with exemption for owner-occupied properties, or below state-specific thresholds; land tax applies as a proportion of the total value.
  - States enable councils to levy rates and charges on properties; some surcharges apply to vacant land or absentee owners.
- Land or Property Transfer (Stamp) Duty:
  - Applied by individual States to the sale or transfer of land or a business, with assistance and concessions to first-home buyers; stamp duties are an upfront tax on the full capital value of the asset.

### Key statistics and numeric points (preserved exactly as in source)
- Hypothetical Borrower Exercise reference date: policies in place as at December 31, 2014.
- Increase of average risk weights to at least 25 percent from about 16 percent (effective July 1, 2016).
- Equivalent increase in minimum capital requirements for major banks by approximately 80 basis points.
- Countercyclical capital buffer applying from January 1, 2016 will be zero percent of risk-weighted assets.
- APRA interest-only new lending cap: 30 percent of new residential mortgage lending.
- LVR scrutiny thresholds: above 80 percent; above 90 percent.
- Investor lending benchmark: 10 percent growth.
- Interest rate buffers: comfortably above 2 percentage points.
- Interest rate floors: comfortably above 7 percent.
- Income haircuts: at least 20 percent for most types of non-salary income and expected rental income.
- Very high debt-to-income threshold: debt greater than six times a borrower’s income.
- New Zealand: 10 percent limit on new mortgages at LTVs over 80 percent (Oct 2013); 5 percent cap for loans with LTV>70 percent for Auckland investors (2015); in 2017 about one-third of borrowers had a DTI of 500 percent or more.
- Canada: LTV reductions and adjustments (100%→95% in 2008; portion above C$500,000 to 90% in 2016); one percent reduction in LTV found to reduce annual growth of credit by 0.5 percent.
- United Kingdom: LTI≥4.5 times income expected to be less than 15 percent of aggregate volume of new loans.
- Norway DTI cap: total debt limited to five times the borrower’s gross annual income.
- The Netherlands: LTV reduced to 100 percent in 2018 (from 106 percent in 2012).

- Studies and reports cited in the text include IMF 2014; Cerutti, et. al., 2017; Richter, et. al., 2018; Kuncl (Bank of Canada, 2016); RBNZ (2017); Norges Bank (2017); ESRB (2018).

*Source: 1ausea2019003 - 445. The review found lenders had been falling short of their responsible (PDF chapter/section).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1ausea2019003.pdf_