The banking watchdog has vowed to review banks' serviceability standards to ensure credit policies aren't being unduly loosened.
APRA chairman John Laker has told a Melbourne meeting of the American Chamber of Commerce in Australia that the prudential regulator is keeping a close eye on bank lending standards in a low credit growth environment. Laker said APRA would pay particular attention to serviceability calculations.
"Loan serviceability criteria are a critical part of the approval process. Weaknesses in serviceability policies can quickly lead to increases in the volume of loans defaulting in an economic downturn," Laker said.
Laker pointed out that Australian households were extremely sensitive to movements in interest rates, and paid a high proportion of their disposable income on debt interest.
"Against this background, the targeted review asks external auditors to assess the strengths and weaknesses of the serviceability criteria used for housing loan approvals by the ADIs involved. This includes an examination of the different kinds of serviceability calculators used by the ADI," Laker said.
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