Fresh from the ABC:
The financial regulator says it is “working assertively” with banks to make sure they do not slash their home lending standards to chase more business.
The Australian Prudential Regulation Authority’s chairman John Laker has told an economics lecture that banks need to remember the lessons of the US housing meltdown.
He says bank directors have assured him that lending standards are being maintained and APRA audits have not found any major problems, despite some major banks now advertising 5 per cent deposit home loans.
“We are pathologically worried about poor credit standards if they became pervasive,” he said.
But he says the size of the home loan deposit isn’t the only risk factor for a bank.
“You may see those ads. They’re certainly becoming more active,” he said.
“What we need to understand is how much of a banking institution’s lending is done at a high loan-to-value ratio, how rigorously that lending is assessed as to the ability of the borrower to repay that.
“So we’ve got to go beyond that ad to actually say: what is this saying about the portfolio and about the quality of risk assessment?”
Dr Laker says APRA is satisfied that most banks are maintaining appropriate lending standards.
“We’ve just completed last year a review of debt service ability through the use of external auditors,” he said.
“We have assurances from bank boards that they’re closely monitoring their lending standards.”
It goes on:
“In the past, when competition went beyond price, it took the form of loosening of credit standards,” he said.
“I think our bank boards and our credit union and building society boards are all very well aware of that. So ask a prudential regulator are they worried about credit standards; yes, pathologically we do.”
And those concerns are only likely to grow. Dr Laker says he expects demand for loans to accelerate while interest rates remain at record lows.
“Consumer confidence is picking up and certainly if you open the newspapers on a Saturday, if you’re not at an auction you must have no life because that’s where everybody is,” he jokes.
“The Australian psyche is starting to get more confident and it will start to be reflected in housing lending.”
The Reserve Bank governor Glenn Stevens, who was at Dr Laker’s speech last night, last month publicly warned banks not to be too aggressive in chasing business.
“It’s very important that strong lending standards remain in place and that decisions, either to lend or invest, be based on sensible assumptions about future returns,” he said at a speech in late October.
Dr Laker was not quite as blunt publicly, but he did hint that the regulator has been in touch with banks, perhaps giving them a reminder about recent financial history.
“A concern we’re focused on quite specifically is lending standards,” he said.
“We’ve been working quite assertively with our banking institutions about their lending standards.
“We don’t want the memories of the earlier correction in housing prices in Australia a decade ago, or the memories of what’s happened in housing markets in Spain, Ireland, the US, we don’t want those memories to be short, we don’t want those memories to be selective.”
Here’s an idea. Make the LVR and other prudential rules transparent instead of offering empty reassurances. That way further inflation of the bubble is, quite simply and reassuringly, impossible.