RBA cautions against relaxing credit standards

by Julia Corderoy09 Sep 2015
The Reserve Bank of Australia has warned lenders not to ignore the signs of a property bust.

The head of the Reserve Bank’s financial stability department, Luci Ellis, told the University of New South Wales Real Estate Symposium yesterday that lenders needs to ensure they maintain prudent credit assessments, despite the strength of the property market.

“I don't want to sound flippant about this, because history does tell us that it is possible to forget good credit risk management. One of the things we risk forgetting about property markets and financial stability, and about risk more generally, is that it is possible to forget.

“In particular, it is possible to forget how to do good credit risk management. The body of knowledge about best practice in this area has certainly expanded over the past quarter century, but that doesn't mean it is always practiced. It is all too tempting to ease standards over time.”

Ellis has also reminded lenders not to forget that the property market – and a property market bust – is not just about household mortgages, urging them not to ignore a boom in commercial finance.

“Property development, including for residential property, and commercial lending related to property more generally, should also receive sufficient attention from risk managers, policymakers and academic researchers. It is these segments of lending that tend to grow in importance in the late stages of a boom, and to account for a disproportionate share of loan losses in a bust,” she said.

“And if we are looking for surges in credit growth as precursors to painful downturns, we should bear in mind that, historically, these surges have been evident in business credit far more than in housing credit. That is certainly what we see in the Australian data.”