Competition behind low lending standards: APRA

by Miklos Bolza30 Oct 2017
The Australian Prudential Lending Authority (APRA) chairman says intense competition in the banking industry led to an erosion in lending standards and pushed the regulator to act.

Facing the Senate Economics Legislation Committee on Thursday (26 October), APRA chairman Wayne Byres described a “race to the bottom” as banks and lenders fought over market share.

“As we found ourselves in an environment of higher house prices, higher household debt, historically low interest rates, and what has become quite subdued income growth, [we expected] to see the prudent banker tightening their standards… We didn’t see that happening.”

This meant banks were less concerned about the borrower’s ability to pay back their loan with lenders instead finding ways to offer more money, he said.

Benchmarks on investor and interest-only lending were introduced to reinforce and maintain lending standards at a “sensible level” regardless of where housing, interest rate or macro-economic cycles go in the future.

“[It] took the pressure off individual institutions to think they had to keep winning market share. The way they were winning market share was eroding standards. Now there’s limit to how much you can do that, so it’s taking that pressure off.”

Discussing APRA’s investor speed limits, he said slowing down investor lending was not the objective in and of itself.

“[By] constraining bank’s and lender’s capacity to rapidly grow, they’re less inclined to erode the standards. It takes some pressure off that erosion and reverses that trend.”

As for interest only lending, Byres admitted that these loans did have their place.

“There will be borrowers who for good reason prefer to have interest only loans. It does mean their debt is staying high. They’re not paying anything back. They’ve got very high debt while interest rates are very low but that will not necessarily be here forever.”

Finally, Byres said that APRA was reluctant to impose limits on high LVR lending as this would most likely affect first home buyers. However, he noted that levels of high LVR loans were contracting by themselves.

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