Two of our big banks — CBA and ANZ — are arguing over how a lender should assess a borrower when applying for a home loan. Right now the banks have been forced by the Australian Prudential Regulatory Authority to add 3% to a potential loan interest rate to see if the would-be borrower could cope if rates rose, say from 6.3%, the current average home loan rate, to 9.3%.

The boss of the CBA, Matt Comyn, says the 3% slug does make borrowing harder but he likes how it makes the overall financial system safer. He thinks those criticizing APRA’s 3% rule want to encourage more borrowing as home ownership rates are on the slide.

Commyn was addressing a Trans-Tasman Business Circle lunch and the AFR’s Dominic Lorrimer reported what this big banker had to say about borrowing standards in Australia.

APRA’s 3% rule is being looked at by a Coalition-chaired Senate inquiry, with critics arguing it’s keeping too many people out of loans and owning property.

In contrast, the ANZ argues the 3% buffer and the big rise in home prices means primarily mortgages are going to relatively rich people!

However, Comyn says their removal could amplify future shocks in the financial system by increasing the pool of high-risk loans. He thinks the APRA attitude makes the banking and financial system more risky.

He accepts dropping the buffer to say 2.5% would get more home applications across the line but he’d rather see more homes built, which would help lower house prices.

He is also worried about rising jobless rates and the borrowers who are already delaying home loan, which shows up in rising repayment delinquents.

The REA Group calculates that since the Reserve Bank started raising interest rates in May 2022, the typical household has experienced a 35 per cent fall in how much money it can borrow.

REA’s economics team says APRA should develop a buffer that fluctuates in line with rates, which makes sense, but I’d argue that the regulator also has to assess if borrowing is becoming over-the-top or is collapsing, and that’s when it should raise or drop the buffer.

Lorimer points out that “all of this is being debated as a Senate inquiry is considering whether APRA has too much power over lending, and whether some of its responsibilities should be transferred to Parliament or come under more scrutiny from legislators.”

The Coalition’s spokesman on homeownership, Andrew Bragg, thinks APRA has too much power over rates and its role needs to be assessed and changed if that would improve the home loan market.

“Frankly, it’s a massive thing for parliament just to give [powers] to APRA, just for them to do in the dark and have no oversight, transparency or even disallowance,” Senator Bragg told the ABC on Tuesday.

That said, the Senator was not saying if he was going to back a reduced role for APRA.

For my part, I think APRA should tweak the buffer to suit circumstances. Given the slowing of the economy I think the buffer should be 2.5% and it should rise and fall when the economy needs it. To date APRA has done a good job keeping our financial system one of the best in the world.

This debate looks like it is an unnecessary political blue ahead of an election next year, which shouldn’t surprise too many Australians. It comes as the loonies from the Greens want Treasurer Jim Chalmers to overrule the RBA and use his powers to cut rates!

The Treasurer could do it, but if he did the Aussie dollar would sink like a stone and we’d become the laughingstock of the outside money world. Also, the lenders from overseas, who banks depend on, would charge us higher rates because we’d be seen as a more dodgy borrower and banks would pass that onto borrowers.