For the second time in a week a senior financial regulator has warned our banks against relaxing their lending standards on home loans.
A week ago last Friday, Dr John Laker, the head of APRA, the country’s lead bank regulator, repeated a warning on home lending he made a year ago in his first appearance of the year in the Senate Estimates hearings.
Last Thursday, the head of the Reserve Bank’s Financial Stability Department Luci Ellis reminded a mortgage conference in Sydney that lenders had to guard against reducing standards.
The two warnings have raised speculation that the regulators have spotted our banks trying to drive revenue growth by relaxing lending standards. But regulatory sources say there’s no sign of this at the moment from the banks, and that the two public comments are a form of ‘jawboning’ ahead of any problems developing.
"I do not currently see signs of widespread lax lending practices here in Australia. Indeed, APRA has been consulting with the boards of the larger banking institutions about their housing lending standards," Ms Ellis said in her speech to a financial conference in Sydney.
"But there will be times – good times, when everything seems rosy – when lenders will find it hard to maintain the necessary prudence."
So no sign of "widespread lax lending practices" which implies there’s some, but it’s not a problem, yet.
And APRA has been talking to the big banks about not trying to boost their weak revenue growth by making it easier for people to borrow to buy homes (such as loosening the loan to valuation ratios).
Dr John Laker told the Senate committee that lenders had to be careful as the economy grows more slowly than many had expected in the next couple of years.
"As a prudential regulator must do, the current operating environment presents a more general challenge for the Australian banking industry. This was highlighted in our 2011 Annual Report, which was tabled shortly after our last appearance before the Committee. Our message bears repeating.
"If the current cautious approach of households and businesses towards taking on additional debt persists, authorised deposit-taking institutions are very likely to be denied the strong balance sheet growth that supported a sustained period of profit increases before the crisis.
"In these circumstances, boards and management may be tempted to chase unrealistic expectations for returns on equity by assuming more risk — through lowering credit standards or seeking new and unfamiliar markets where they may have little comparative advantage — or by aggressive cost-cutting that may weaken risk management capacities.
"These temptations must be resisted in favour of more measured strategic ambitions."
Ms Ellis echoed those sentiments when she told the conference, “It is always tempting to ease lending standards, and dress that up as responding to competition or giving the customer a better deal.
"It must be hard to resist the disappointed customers who just want to borrow that bit extra to purchase their dream home, especially when the loan officer is also trying to make budget on new loan approvals.
"But in the experience of the United States, we have seen what can happen when lenders yield to that temptation."
Ms Ellis outlined the potential risks of more households defaulting on their mortgages but stated that local lending standards had never deteriorated to the levels seen in the US in the past decade.
"I would like to stress that Australia, like many other countries, does not have the ingredients needed to create an outcome like that in the United States," said Ms Ellis, in her speech to the Australian Mortgage Conference in Sydney.
"But it is important that we continue to avoid the same mistakes. By ‘we’, I do not refer only to policymakers. Mortgage lenders need to refrain from easing lending standards the way they did in the United States. And so far, you have been refraining."
Capital city home prices fell almost 4% over the past year, and the pace of loan growth has slowed in the new year.
Home lending is at 34 year lows, growing 5.4% in the year to January. That is still the fastest growing part of bank lending at the moment.
When one key regulator raises an issue like lending standards in public or, in fact restates to an earlier comment from a year ago, you wonder why the need for two warnings in a week.
