IMF Australia head Thomas Helbling has given financial regulators the tick of approval.
The management by financial regulators of big macroeconomic risks has been endorsed by the International Monetary Fund, which still wants local authorities to take more steps to shore up the financial system.
The support for financial regulators contrasts with the banking royal commission’s damning findings that the Australian Securities and Investments Commission and Australian Prudential Regulation Authority did not crack down hard enough on misconduct by financiers in pockets of the financial industry.
Because interest rates are expected to remain low and household debt is high, the IMF’s review of Australia’s economy advised that the regulatory framework and macroprudential tools be updated to further bolster resilience.
APRA, backed by the Coalition government, has slowed home investor lending through caps on interest-only loans and speed limits on investor loans.
IMF mission chief to Australia Thomas Helbling said authorities could make early preparations to expand the toolkit, to possibly include lending limits based on debt-to-income and debt-servicing costs, in case they were needed in future.
“Given prospects of interest rates remaining low for some time, macroprudential policy should focus on expanding the available toolkit by addressing any data, legal and regulatory requirements and thus enhancing readiness to implement such measures if and when needed,” the IMF said in its concluding Article IV statement on the economy.
Reserve Bank of Australia deputy governor Guy Debelle said last week that APRA’s interventions had helped reduce the riskiness of new borrowing and improved the resilience of the economy to future shocks.
APRA’s view has been that it will always consider international input, but existing debt serviceability measures already effectively cover debt-to-income issues almost by default.
The IMF’s preliminary findings give an early glimpse of what is likely to appear in the separate and yet-to-be-published IMF’s Financial Sector Assessment Program (FSAP) due next year.
It called for strengthening the transparency of the Council of Financial Regulators (CoFR) on the identification of systemic risks and actions taken to mitigate them.
The CoFR is made up of senior officials from the RBA, APRA, ASIC and Treasury.
The IMF’s FSAP has also recommended increasing the independence and budgetary autonomy of the regulatory agencies, strengthening the supervisory approach, particularly in the areas of governance, risk management and conduct, and enhancing the stress-testing framework for solvency, liquidity and contagion risks.
“The FSAP also recommends strengthening the integration of systemic risk analysis and stress testing into supervisory processes, completing the resolution policy framework and expediting the development of bank-specific resolution plans,” the IMF said.
RBA governor Philip Lowe has called for more transparency of the CoFR, and the bank’s recent financial stability review published more information about the body.
There are pros and cons of more transparency of CoFR meetings. An academic review of the US Federal Reserve’s meeting found that once members became aware transcripts were being recorded, they became less forthright in expressing their views.
Unlike equivalent bodies overseas, the CoFR is a non-statutory body used to share information between regulators, rather than making legally binding decisions.
APRA chairman Wayne Byres has increased transparency in recent years including public statements in December 2014 on concerns about a surge in investor lending growth and the 2017 caps on interest-only loans.
The IMF praised the Coalition government’s recent funding boosts to regulatory agencies, after earlier budget cuts.
Treasurer Josh Frydenberg welcomed the IMF findings, saying the “cooling of the housing market is welcome and contributes to improving housing affordability”, noting that measures introduced by APRA have reduced the share of investor and interest-only borrowing and lowered the risks to financial stability.
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