Competitive concerns behind risky lending: RBA

The RBA has said a lack of self-constraint by the banks has required a supervisory approach to better lending practices

Competitive concerns behind risky lending: RBA

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Concerns around maintaining a competitive edge are one reason why banks have been allegedly unable to reign in risky lending of their own accord.

This was the opinion of Reserve Bank of Australia (RBA) governor Phillip Lowe during a speech at the Reserve Bank Board Dinner in Brisbane on Tuesday night (5 September).

Referencing the high levels of household debt around the country, Lowe said the RBA had been working closely with the Australian Prudential Regulation Authority (APRA) to ensure strong lending practices within the industry.

“Rightly, APRA has had a strong focus on loan serviceability calculations. In some cases, loans were being made where the borrower had only the slimmest of spare income. APRA has also introduced restrictions on growth of investor loans and restrictions on interest-only lending. This has been the right thing to do.”

As for why the lenders did not work harder to constrain lending activity in these areas of their own will, Lowe said that single institutions by themselves had difficult implementing any kinds of lending restraints.

“Each worries about their competitive position and about the market reaction. Individual institutions are also more likely to focus on their own risks, rather than the risks to the system as a whole. This means that supervisory measures can be useful in helping the whole system pull back.”

In an ideal world, individual lenders would exercise restraint through their own “holistic” risk assessments, he said.

“But when this does not occur, supervisory measures can play a constructive role. Most lenders are now operating comfortably within the new restrictions and these measures are not unduly restraining the supply of overall housing credit.”

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