Banks should be proactive when it comes to risk, argues J.P. Morgan

by Julia Corderoy04 Sep 2014
Leading financial services firm, J.P. Morgan says that banks adopting a more proactive approach to lending risk will reduce concerns over mortgage debt serviceability when interest rates rise – for both the banks and consumers. 

This year has been a whirlwind for the mortgage industry – as interest rates hit rock bottom, competition for lending heat up and property prices sky-rocketed. As such, there has been a lot of focus on how Australia’s banking system and its consumers will fare when the dust settles and monetary policy begins to tighten.

A key theme of the Financial Services Inquiry (FSI) was on banks holding more capital to insure against the higher demand for mortgage lending. However, J.P. Morgan banking analyst Scott Manning says the FSI should focus more on banks adopting a proactive approach to risk – where they try and reduce the risk in the first place, as opposed to insuring against the risk.

“In our view, more consideration should be given to actually reducing the probability of default rather than focussing on increasing capital requirements. In simple terms, this should form part of simple day-to-day risk management at the individual bank level with the overall benefit of reducing system risk in the event of large macro shocks,” he said.  

J.P. Morgan’s latest Australian Mortgage Industry Report says Australia should look to the UK for sensible macro-prudential policy. 

The report argues that one alternative measure to strengthen the system and combat lending risk should be an increase in the interest rate buffer from 2% to 3%, when assessing a borrower’s ability to afford their mortgage. This is following the lead of the UK, who increased their interest rate buffer after house prices rose by 20% over the last 12 months.

"Rather than ask the banks to hold more capital relative to the risk they are taking, why not aim to reduce the risk they are taking relative to capital levels?" the report asks.