The Australian Prudential Regulation Authority (APRA) said Thursday it was seeing some signs of a pick-up in higher-risk lending in the housing sector, particularly high debt-to-income borrowing by investors.
Following the announcement, ANZ Group's (ASX:ANZ, NZE:ANZ) Australian and Kiwi shares each gained about 1% in recent Thursday trade, Commonwealth Bank of Australia (ASX:CBA) and National Australia Bank (ASX:NAB) shares each gained over 1%, and Westpac Banking (ASX:WBC, NZE:WBC) shares added 1% in Australia and New Zealand.
In its November system risk outlook report, APRA said it is closely monitoring any build-up of domestic vulnerabilities, particularly in the housing market, including high household debt. The gross debt of Australian households has been around 1.8 times their incomes for almost a decade, making this a key vulnerability in the financial system.
The aggregate household indebtedness could increase further, and other housing-related vulnerabilities could build. Therefore, the regulator has been engaging with the lenders it regulates to ensure a range of macroprudential policy tools can be implemented where needed.
More than two-thirds of the entities regulated by APRA think geopolitical risk is a top concern, and the regulator said the risks to the system from overseas were heightened.
APRA and the Council of Financial Regulators are working to boost the Australian financial system's resilience through a dedicated geopolitical risk work program, per the report. The geopolitical environment is expected to remain volatile, and the system's resilience could be eroded if institutions are not prepared for a wide range of scenarios.
It also cautioned that increasing interconnectedness of the financial system elevated the potential for shocks in one sector to have a system-wide impact.
The key findings from the first phase of APRA's inaugural system risk stress test suggest that the structural features of superannuation funds mean that the industry acts as a stabilizing force for the financial system during times of stress. However, their actions can also amplify the negative effect of the shock on members and the system in some cases.
The second phase of the stress test will begin shortly, the regulator said.