What is prudential regulation?

APRA's rules flow through to lender policies in predictable ways. Banks must hold capital in proportion to the risk of what they lend, so when APRA raises capital requirements, or a bank becomes more conservative, the bank shrinks its lending book to manage capital. Borrowers and brokers see that as tighter serviceability calculations, longer wait times, or lenders withdrawing from segments such as investor loans, self-employed borrowers or construction finance.

APRA also expects banks and other authorised deposit-taking institutions to assess borrowers at a margin above the rate offered, a serviceability buffer set out in its prudential practice guidance rather than in a binding standard. When the buffer rises, borrowing capacity falls across APRA-regulated lenders even though advertised rates have not moved. Non-bank lenders set their own buffers, which is one reason a deal that fails at a bank can still be placed. Guidance on maximum LVRs by loan type has the same effect: fewer high-LVR investor loans, so investors need larger deposits.

Beyond bank-by-bank capital rules, APRA can impose speed limits or caps on specific loan types to cool risk building up across the whole system. It has previously restricted the share of new interest-only lending in a bank's residential mortgage book, capped how fast banks could grow investor lending, and required major banks to hold extra capital during periods of economic stress. Each time, lenders responded by cutting products, raising minimum deposits and tightening assessments, and marginal borrowers found approvals harder to get.

Lenders are not being cautious for its own sake. They must maintain minimum capital ratios even under stress scenarios, prove through stress testing that they could survive a severe downturn, document credit decisions and risk management thoroughly, and comply with APRA's macroprudential guidance. A lender that tightens LVRs is usually meeting a regulatory requirement to hold more capital against higher-risk loans, not doubting the individual borrower.

Two regulators shape Australian lending. APRA focuses on safety and soundness: are banks solvent, do they hold enough capital and liquidity, could they survive a crisis? Its rules are prudential, and they are why lender credit policies sometimes seem overly cautious. ASIC focuses on conduct and consumer protection: are borrowers treated fairly, is information disclosed clearly, and are responsible lending obligations met?

A lender can be APRA-compliant and still fall foul of ASIC if it hides fees or pressures vulnerable borrowers. Brokers sit between the two: they must meet ASIC's responsible lending and licensing rules on one side, and work within lender credit policies, which APRA shapes, on the other. Both regulators matter when explaining to a customer why a deal that worked last year no longer fits.