APRA warns banks on bubbles

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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.

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Comments

  1. There was a BIS report out recently which examined I think 57 countries over 3 decades and it came to the conclusion that more than LVR restrictions, strict servicability guidelines were more important to banking stability and price growth. The report also favoured a land tax over the revenue raising measure that we currently employ.

    APRA don’t lay down any LVR restrictions that I’m aware of but it’s well known within the industry that they are jawboning it and probably will introduce it if lenders get over zealous.

    What APRA do is lay down very strict ground rules to ensure that every single loan must demonstrate servicability. That is the single most important macroprudential tool that they can employ.

    • What is the serviceability limit that APRA apply? Principle + interest repayments < x% of individual or household after tax income @ current interest rates?

      What about for houses rented out, do they add rent into the income calculation and combine all loans with all lenders?

      • Hi AB. It’s absolutely Verbotten for a lender to lend where the ability to repay can’t be clearly demonstrated, so I’m not aware of any lending outside servicability guidelines.

        The lender faces a real possibility of the courts deeming the loan unconscienable and the debt would then be written off.

        I would need more information on precisely what those loans are.

        • “I would need more information on precisely what those loans are.”

          The graph is labelled “Source: APRA, UBS estimates” so I would guess UBS takes some reported stats and then tries to reverse engineer them.

          Any idea how UBS does it H&H?

          • The thing is that there is NO waiver on serviceability. It either meets the requirements or it doesn’t, and if an application can’t service the borrowings then it can’t proceed. End of story.

            Business loans can proceed on projected incomes for start ups etc rather than actuals and any home loan wrapped up within an overall submission would be included, but not normal consumer home loans.

            The chart specifically refers to home loans.

            I would need to know what that data represented rather than speculate.

          • Thanks again for the info Peter.

            Are there standardised tests for serviceability or does each bank do its own calculations?

          • No there is no standardised test that APRA requires. They lay down guidelines with an overarching commandment of “Thou shalt not stuff this up” and that works a treat.

            Read this review from June – page 40 onwards – that will answer most questions.
            http://www.apra.gov.au/Insight/Documents/Insight%20Issue%202%202013_Web.pdf

            Mostly the banks have similar calculators but with some differences in the buffers used for interest rates, living allowances, rental income etc.

            There is room for different interpretations of APRA’s message, but they are all quite strict nevertheless.

    • “bank directors have assured him”; well, you can take that to the …er.. bank?

      Is the CBA loan “scandal, falsified application, still in the play book.

  2. Next will come the warning that the Government is doing too much! “The government’s targets for new home building in Auckland may be way too high and, if achieved, could quickly lead to an over-supply of housing in the currently under-supplied market for the country’s largest city, says the New Zealand Institute for Economic Research. Instead of targeting between 20,000 and 30,000 new homes, NZIER reckons the current shortage is more like 5,000 homes. If the targets for Auckland were met, it could put significant downward pressure on Auckland house prices.”

    • If the targets for Auckland were met, it could put significant downward pressure on Auckland house prices

      Sounds good. Hopefully the suppy targets will be met and house prices will fall as would be expected.

  3. mine-otour in a china shop

    In the event of a crisis the RBA will blame APRA, and APRA will blame the boards of banks, and they will blame the executives at the bank.

    Boards are rarely in touch with what happens at most firms. Often important information is kept downstairs and out of sight.

    Send them a load of useless papers, keep them busy on other things and assure them that the risk appetitie statement and risk models are all fine.

    Now to enjoy those nice prawn sandwiches and Chateau Lafitte 1938.

  4. Dear banks,

    We are very very angry with you for lowering your lending standards. This letter is to advise that we are in the process of writing a much nastier letter to you telling how very very angry we are.

    Don’t make us post it! This is your first warning.

    Hugs & Kisses,

    APRA

  5. It’s APRA that needs to do something other than “warn” the banks…..They’re not listening APRA…..

    How ridiculous is this situation?

    • How do you know the banks “are not listening”? What evidence of this do you have? It’s certainly not from the article you are commenting from!

      • “…despite some major banks now advertising 5 per cent deposit home loans.”

        From the article he’s commenting on.

        • So? Doesn’t mean anything – as long as people getting 95% LVR loans have an adequate risk profile and the ability to service the loan, then yes, the banks are listening.

          95% LVR does not automatically = bad loan / high risk of default.

          • It means if 95% LVR people lose their jobs, the bank won’t recover all their money. The banks need to be controlled because they can’t control themselves.

            I’ve had so many conversations with people that have been offered way more than they can afford….One friend took it on and then needed to divide his house to take in renters….

            When will the government step in and save the taxpayers from the behemoths?

          • “It means if 95% LVR people lose their jobs, the bank won’t recover all their money” – not correct. You know about Lenders Mortgage Insurance (LMI) right?

            Only in a full-blown systemic financial crisis / housing collapse would LMI maybe struggle to cover banks losses if 95% LVR loans default. Hence why APRA is far more interested in the borrower risk profile and servicibility criteria applied etc. They are interested in the systemic risk.

          • If unemployment rises in any meaningful way, the insurance companies will not be able to pay.

            House prices would be in a downward spiral and suddenly 80% LVR’s are in trouble…..