APRA sets out framework for using macroprudential tools to promote financial stability

The Australian Prudential Regulation Authority (APRA) has set out its framework for the use of macroprudential policy measures to promote the stability of Australia’s financial system.

Unlike the targeted actions APRA takes to shore up the soundness and stability of the individual banks, insurers and superannuation licensees it supervises, macroprudential policies are used to mitigate risks at a system-wide level. 

In an information paper published today, APRA has outlined the framework it uses when assessing whether macroprudential intervention is appropriate, and which tool or combination of tools would best achieve its intended objective. 

The paper covers the risk factors APRA uses to identify emerging threats to financial stability, the policy tools APRA can choose from, and the importance of consulting with other members of the Council of Financial Regulators as part of the decision-making process.

APRA Chair Wayne Byres said macroprudential policies were an essential part of APRA’s toolkit aimed at fulfilling its statutory objective to promote financial stability.

“Unlike our day-to-day supervision of individual entities, macroprudential policies allow us to target risks to the entire financial system; whether it be curbing excessive risk-taking in a buoyant market, or conversely encouraging investment and economic activity during a downturn.

“APRA has a wide range of tools it could potentially deploy in such circumstances. Today’s paper is intended to give financial industry stakeholders a better understanding of the factors APRA considers in making decisions to use these tools, the types of macroprudential measures APRA could deploy in the future, and how they might be implemented,” Mr Byres said.

In conjunction with the information paper, APRA has commenced a consultation into an update to APS 220 Credit Risk Management (APS 220) that would require banks to ensure they could implement limits on higher risk residential mortgage and commercial property lending in a timely and effective manner.

Submissions to the consultation close on 28 February next year.

The information paper is available on the APRA website at: Macroprudential Policy Framework.

The letter to industry can be found at: Proposed revisions to the credit risk management framework for authorised deposit-taking institutions.