APRA imposes the new normal

In recent months, the credit ratings agencies – Standard & Poors, Moody’s and Fitch – have warned against the re-emergence of the Australian banks’ pre-GFC business model of borrowing heavily from offshore to pump the Australian housing market.

However, with housing credit growth now at 35 -year lows:

Other categories of lending even more subdued:

And Australia’s household savings rate at multi-decade highs:

The banks have actually reduced their reliance on offshore borrowing and turned instead to funding new lending via deposits.

One by-product of the contraction in credit growth has been the Australian banks’ increasing propensity to compete for market share by lowering credit standards.

For instance, in December last year, Westpac announced that it would accept rental payments as a form of savings for a home deposit in order to widen the target market for the bank’s home loans. Then in March it was reported that Australia’s banks are lifting maximum loan-to-value ratios (LVRs) and are, in some cases, waving mortgage insurance payments on high LVR loans in an effort to increase mortgage lending. And more recently, NAB has slashed mortgage rates via its UBank arm, a move that is apparently a loss-leader for the bank.

Lets not forget that the banks are now offering to pay the exit fees of customers who shift their mortgage from a rival bank, and is some cases are resorting to questionable tactics to stimulate new loan growth (as reported by Delusional Economics here and here).

The banks’ actions are understandable. Since nearly 60% of their total lending is directed toward housing, they are heavily reliant on issuing ever-increasing loan volumes in order to sustain profit growth. At the same time, the security over the banks’ assets (loans) depends heavily on the value of the underlying homes on which they have lent.

Put simply, if Australian households reduce their borrowings, bank profits fall. As such, they are increasingly willing to relax lending standards and offer mortgages to higher risk borrowers in order to sustain both (short-term) profitability and Australia’s over-inflated housing values.

However, it’s a high-risk game that appears to have finally piqued the Australian Prudential Regulatory Authority’s (APRA) interest. As reported in the Australian Financial Review (AFR) yesterday, APRA has sent the banks’ chairmen a letter warning against risky housing lending:

The Australian bank regulator has put bank boards on notice over mortgage lending standards amid signs competition for market share is driving increasingly risky practices.

In a letter addressed to chairmen, the Australian Prudential Regulation Authority reiterated the need the for appropriate a mortgage pricing, adequate loan-to-valuation ratios, loan service­ability and other risk criteria.

“In effect, APRA is asking boards are they satisfied with the credit standards in their bank,” one bank source said. “It’s certainly got a few risk officers going with board reviews.”

APRA is concerned the lower overall growth in mortgage lending has led to instances of overly aggressive competition and is not happy some lenders have “only” eased standards to what they were before the global financial crisis.

“When they hear language [from the banks] like ‘we tightened up lending standards during the GFC and we are just going back to normal’, that gets [APRA’s] attention, said one industry executive.

Another risk officer familiar with the regulator’s position said: “The point is, we are in a different world compared to 2007. That’s [APRA’s] view, so normal is different”…

Some of the “old practices” APRA has flagged include LVRs rising to 95%… and a rise in the cut-in point when borrowers are asked to pay for mortgage insurance, making it possible for riskier borrowers to get a loan…

Some factors APRA is considering include how price rises for housing are built into valuation models, loans to first home buyers who may be carrying debt already, and whether the drive for market share is reflected in lower hurdles for potential borrowers…

Clearly, both the ratings agencies and APRA have signalled that they will not tolerate a return by the banks to pre-GFC levels of mortgage lending. And with mortgage credit growth to remain constrained, the prospect of continued house price growth is diminished as is the banks’ ability to continue growing their profits.

Welcome to the new normal.

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  1. Most importantly, if credit is contracting, so is the money supply which results in asset price deflation. What’s happening in Europe, United States and here is the result of an unsustainable monetary system based on debt. IF DEBT IS NOT GROWING THERE IS ECONOMIC CONTRACTION – SIMPLE AS THAT. This systems favours the parasites who reap the benefits of interest on debt and creates continually growing debt which can’t be repaid. The solution to this problem is that our governments issue debt free money ie print money and not attach debt at interest to it.

    Getting back to our property market, the reason the banks and governments fall over themselves to promote people taking more credit (stiff competition, government handouts and incentives) is to keep the ponzi scheme going as without continued borrowing by home owners, housing will collapse as we are starting to see.


      • -1

        There’ll be a Debt Jubilee before we’re done. Peak Oil will make them press the Reset button.

    • Debt system has worked until last couple of decades. The problem is debt has become too easy to get. When debt money is a small part of the economy shifts in debt issuing do not have a big impact. When debt money is what mostly stimulates the economy – like the situation we are in now – any changes in growth of debt will have a big impact. It is the ‘easy debt’ that is the problem.


      Why do you prefer “DEFAULT BY INFLATION (THIS IS THE FAVOURIT? It creates double moral hazard. Not only that rewards greedy people who took more than they can afford but also punishes savers by whipping off their hard earned money

      • John Cage, “Why do you prefer “DEFAULT BY INFLATION (THIS IS THE FAVOURIT? It creates double moral hazard. Not only that rewards greedy people who took more than they can afford but also punishes savers by whipping off their hard earned money”
        The shortest answer is, because capitalism rewards only the greedy. The savers are outdated specie from a past century. The greedy learned how to use any human weakness, you can imagine, for making money. As long as the banks changed their main role in economy (from a financial intermediary to a high risky investors) there is no way back to the “belle epoque” of calm and predictable investments, social security and social harmony.

    • You missed out – Re-distribution of debt via central bank money printing and the resulting (hyper) inflation.
      BTW, go easy on the ALL CAPS 🙂


        It’s much worse than that if the Credit Impulse theory is correct. If debt is not growing as fast as it was then there is economic contraction. It doesn’t have to be declining.

  2. Little wonder APRA, tasked with supervising “institutions holding approximately $3.7 trillion in assets for 22 million Australian depositors, policyholders and superannuation fund members” (aka the FIRE economy), is reminding the Big4Parasites which way is up.

    The 4Parasites have learned little, proven by these facts that:
    • “rental payments” are accepted as a “form of savings for a home deposit”
    • banks have lifted maximum LVRs, and,
    • “mortgage insurance payments on high LVR loans” are being waived

    APRA will be a target of global & local attention in the event of another major financial meltdown if it fails its charter to bring the life-sucking banksters to heel.
    Whether anything more than APRA’s declaration of stern advice to the 4Parasites is achieved will be shown in time.

    • “Big4Parasites”
      I would like to correct this common (mis)perception. The Big 4 banks aren’t parasites. They are, however, parasite carriers.i.e. A legal, but esentially lifeless carrier for banksters to loot and pilage.
      There is no point in attacking the carrier (banks), when the parasite (banksters) can easily slip out the back door. All you will accomplish is self-harm.

  3. Great article UE! This is MacroBusiness at its best…how can the MSM not pick up a story like this!

    Will share it on facebook for sure!

    • “how can the MSM not pick up a story like this!”
      I would of have thought that AFR is a pretty mainstream business newspaper 🙂

      • Sorry Mav – I meant why doesnt anyone from the MNM pick up this ARTICLE…not story…

        But compare the way UE covered the story to the Fin Review article (which is actually not the worst thing Fairfax has produced).

        What about interviewing Steve Keen who has been warning for 6 years about lax standards and walked up a mountain due to a lost bet.

        What about interviewing anyone who is not in the mortgage game to ask their opinion on Australia’s lending standards…Grantham etc..

        See, people just make wrong calls and then move on…everyone raved about our lending standards as being rock solid…and the few dissenters were ignored. This article has done little to point out the massive change in opinion that is taking place about Australia’s supposed financial stability

  4. “adequate loan-to-valuation ratios” made me laugh. Whey don’t they just enforce the appropriate ratio? Haven’t we got enough examples of effectiveness of bank self-regulation.

  5. I think there’s beeen some serious posturing between the Big 4 over the last six months or so. I know of two cases where previously model applicants have been knocked back by NAB, despite the mass advertising.

    Case 1, single guy late 20s, bullet proof income $175K, no debt, 20% deposit looking to borrow $500K.

    Case 2, family mid 40s, income $200K, mortgage free, assets over $1m looking to borrow $300K.

    Make sense of it in light of the increasing LVRs, supposed relaxation in lending standards and ‘we’ve broken up with the other banks’ rubbish they peddle.

  6. Things are REALLY SIMPLE! They really are! Banks were lending money irresponsibly to anyone with a pulse, so now, they get what they deserve! What? As if they didn’t know! If the Banks want to get more business, they should bring the over-inflated house prices down, so that people can start to borrow again, and the Banks lending again, to make their profits. People are not buying Houses becuse they are too over-inflated, therefore they are not borrowing, therefore the Banks are not lending, therefore no profits for the Banks! Let the RBA increase rates, let the housing bubble burst, and let’s all get on with it! Geez!

  7. Thanks, UE. And thanks, cogitator, for stirring the pot!

    I have a dumb question, if anyone cares to answer. As a society creates wealth, it has to store it somewhere. To my simple mind, that alone creates debt – if you put your wealth in the bank, the bank owes you, which equals debt.

    So, isn’t complaining about “our debt-fueled economy” like complaining about our wealth?

    Or is the issue more one of how wealth/debt is managed?

    • Peter, you are making a false claim there.

      Creating wealth, in of itself, does not result in an equal amount of debt.

      If you build a home on your own land with your bare hands, there is no other counterparty involved. You have no liability, you have no obligation to anybody else.

      However, the discussion here is about our banking system. Under fractional reserve banking and fiat currency, banks are able to lend out more than they have in reserves. Because we have a lender of last resort (the central bank), banks can recklessly pyramid loans on top of a small base of reserves.

      The discussion also revolves around the nature of what constitutes money. Alan Greenspan himself was asked to define money by Ron Paul, and he confessed that he couldn’t.

      Money constitutes savings, currency in circulation, credit created out of thin air by banks, reserves that each bank holds at the central bank…

      As people save more and pay down debt, the supply of credit (and money) shrinks. This is deflation, which usually results in falling prices, but Keynesians and central bankers are terrified of deflation.

      They mistakenly believe in a magical downward spiral, where we will never buy food or repair our refrigerator or send our kids to school just because prices move downward.

    • You have pretty much nailed it. When you put money into a bank account, it gets lent out and become someone else’s debt. (minus the reserve ratio). This is how the banking system works. It is another matter if you put the money under the mattress.

      Pretty much all economy in the world is ‘debt-fueled’. In order for a country to run a trade surplus, another country have to run a trade deficit. It’s the way the debt is used which is of greater concern.

    • In the Islamic banking and the old Biblical traditions, debt and usury (interest) are banned.

      All wealth distribution is by way of equity. For example, a small business owner will not borrow money to start their company – they will find someone to invest in their company and share profits.

      It is an ethical and robust system – but I don’t know how applicable it is to modern day economies.

  8. From the AFR article:
    “The biggest risk for the housing market, and for the banks, was that customers who had borrowed money for investment properties assumed house prices would no longer rise, triggering a wave of selling and further depressing house prices, Mr Johnson said.”

    Mr Johnson has hit the nail firmly on the head.

  9. Yeah, but will APRA actually do anything when the SHTF? We’ve just seen the RBA not lift interest rates when inflation is heading towards 4%. Government guarrantees were offered to the private enterprises (i.e. the banks) as soon as their funding was looking a little shaky. The government digs deep to prop up houses by continuing to buy supposedly AAA-rated RMBS. And don’t forget that we almost had RuddBank as well.

    Rules get broken or bent whenever the circumstances aren’t to the liking of the financial system. Extend and pretend is alive and well. APRA may talk a tough game, but I reckon when it all gets a bit hairy, all the financial regulators are going to fold like a house of cards and let all this go through to the keeper. The integrity of the system can’t afford a genuinely ‘tough cop on the beat’, as Julia likes to say. All this stuff will get waved through to the keeper when the time comes, just like it was last time.

    • Ireland gave unlimited guarantee of their bank deposit during the GFC. If a small economy like Australia doesn’t follow, we would face a massive bank run. With the globalization of finance, there are times when you have no choice but to ‘go along’.

  10. I know this maybe just limited incidents but in recent week, I have received two offers from two of Big 4 banks to have easy, guaranteed to be approved in same day, personal loans up to $50-75k limit.

    Talking about easy lending ? I guess they found it hard to grow their mortgage and traditional credit card business and now they’re after new type of loan businesses 😉

  11. I don’t know what to believe. A few years back the doomsters told me that the only thing holding up our house prices was excessive lending from overseas. Now I read that Australian bank deposits are sufficient.
    I notice that peak oil also gets a mention in these comments. Why not throw in Fukushima and WTC building number 7?
    (The houses here are still expensive!)

    • This is common misconception about banking in AU: banks did not borrow overseas because they could not borrow the money in AU, they borrowed overseas because it used to be CHEAPER than the AU domestic rate.

      And contrary to all reports about a contracting credit supply, the broad Money Supply in AU is still growing – and hence (in my opinion) the source of the strong inflation.

      The question now should be: how can the money supply still grow while credit is subdued ? My hypothesis: government deficit spending ….

      It should be noted that an AU bank does not need to possess any deposited cash/reserves before it can issue a new loan. The loan is just created and listed as an asset on the balance sheet while the newly created account balance is listed as a deposit/liability on the balance sheet – with a zero sum.

      AU has no formal reserve ratio – so the bank’s money creation process is only constrained by the risk that a customer withdraws its account balance in cash OR transfers it to another bank. Only in those cases does a bank need to have cash/reserves in relation to that customer.

        • Certainly, these are regulatory requirements acting as a money creation speed-brake but in itself don’t take away the fact that a loan does in theory not need to be preceded by someone making a deposit with an equal amount.

          Basel III adds more liquidity requirements, and as AU banks traditionally have very little cash/RBA reserves relative to their deposit balance (0.5% to be precise) – a new RBA facility had to be invented to formally satisfy B III.

          • The new facility is because there is not enough govt debt for the formal Basel 3 requirements to be used (ie in other countries banks will need to hold govt debt or equivalents for liquidity…we simply dont have a big enough debt market).

    • Yeah – all this intelligent discussion and debate about contemporary global issues and the rapidly changing world in which we live is enough to make a young blokes head just spin, ain’t it?

      Maybe a cup of tea, a Bex, and a good lie down will do the trick.

  12. Whale… Your wrong

    “And contrary to all reports about a contracting credit supply, the broad Money Supply in AU is still growing – and hence (in my opinion) the source of the strong inflation.
    The question now should be: how can the money supply still grow while credit is subdued ? My hypothesis: government deficit spending ….”

    AUD Credit creates AUD deposits

    The AUD credit was created, these deposits flowed off shore as a trade deficit, the banks in USA etc lent USD to Aussie banks to settle the trade using the AUD deposits as security. The Aussie banks swapped/hedged their Fx risk. The AUD deposits never disappear they are always in Aussie bank accounts. The 2.1 trillion credit created 2.1 trillion deposits. The Aussie banks swaps/fx/hedging obscures the real AUD deposit money. If the aussie banks did not hedge 55% GDP in foreign debt a 15 cent movement in AUD/USD fx would make them insolvent.