'Don't be lax in rosy times', RBA warns

by Adam Smith23 Feb 2012

The RBA has warned that banks must not become lax on lending standards in times when "everything seems rosy".

RBA head of financial stability Luci Ellis has told the Australian Mortgage Conference in Sydney that the Australian market is well-placed to avoid the pitfalls of the US subprime crisis. Ellis said prudential standards are much higher in Australia, but warned against the temptation to ease these standards.

"It must be hard to resist the disappointed customers who just want to borrow that bit extra to purchase their dream home, especially when the loan officer is also trying to make budget on new loan approvals. But in the experience of the United States, we have seen what can happen when lenders yield to that temptation," she said.

Ellis suggested that consumers would ultimately be disadvantaged by a relaxation of lending standards.

"If lenders were to ease lending standards beyond the point of prudence, they would not be doing anyone any favours. Their customers, the borrowers, would be overburdened by their debts. The firm themselves would face difficulties if loan defaults were to rise. And financial stability would be much harder to maintain," Ellis said.

While Ellis argyed she did not see signs of "widespread lax lending practices" in Australia, she warned that lenders in "rosy" times could find it difficult to "maintain the necessary prudence".

"While the regulators can take actions and central bankers like me can warn of the risks, in the end we all have a stake in maintaining financial stability," she said.