The Australian Prudential Regulation Authority (APRA) said on Friday that banks with borrowers not meeting the industry standards assessing their ability to repay loans would receive a "heightened supervisory attention".
The regulator advised banks to extend loans to customers only if the bank believed they can repay at three percentage points higher than the current market.
Australia's "Big Four" banks have publicly called on APRA to ease this rule, as in a high interest rate environment some people who took out a loan before the rate hikes are now unable to refinance loans.
Last month, Westpac agreed to refinance loans for some borrowers who didn't meet an industry standard that assesses their ability to repay, not sticking to the guidelines.
"With the potential for interest rates to rise further, inflation still high and the possibility of weaker labour market outcomes, the buffer is an important risk mitigant," said APRA in a statement.
The regulator has also requested banks to notify supervisors if they make any exceptions in its buffer and may request additional information on how the lenders are managing risk.
(Reporting by Navya Mittal in Bengaluru; Editing by Rashmi Aich)
