Fair play for non-majors could be risky: S&P

by Julia Corderoy08 Sep 2014
Credit ratings agency, Standard & Poor's have argued that ‘levelling the playing field’ for regional lenders could create new risks in the banking system.

Regional lenders have told the Financial Services Inquiry that they face an entrenched disadvantage in the mortgage market due to the current risk-weight and capital adequacy rules – which see the big four banks and Macquarie only having to hold about half as much capital for every dollar lent out.

Standard & Poor's are concerned that allowing regional banks to hold less capital would funnel more credit into the heated housing market, according to Fairfax. This would put even more pressure on the economy when the market faces house price corrections. 

"Greater access to housing credit may put further strong upward pressure on house prices. This would increase the risk of a disorderly correction in property prices down the track, which may hurt economic growth and risk financial instability," Fairfax quoted the credit ratings agency.

"We already view the household sector as highly leveraged, driven by previous run-ups in house prices. Promoting higher household leverage could therefore raise households' financial vulnerability even further."

The looming prospect of a property market correction has been a focus of the Financial Services Inquiry – with APRA and the Reserve Bank expressing concerns to the Inquiry about the consequences a market correction might have on the economy, as competition in the mortgage lending sector has been on fire.