APRA, ASIC and RBA ratchet up the pressure on banks

APRA, ASIC and RBA ratchet up the pressure on banks

7 April, 2017

This week has seen plenty of action in the ongoing debate about property prices and investment loans.

Last Friday, APRA wrote to all banks requiring them to tighten their lending practices, particularly on interest-only and investor loans, reported The Sydney Morning Herald.

APRA’s action followed a warning by Treasurer Scott Morrison that regulators need to crack down harder on high-risk loans, particularly to real estate investors.

The new rules require banks to lower the proportion of interest-only loans to below 30 percent of all loans, from 40 percent at present. It adds to an existing 10 per cent “speed limit” on investor loan growth that APRA has been enforcing since early 2015.

Currently all four major banks are well over the new 30 percent interest-only quota.

“Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions,” said APRA chairman Wayne Byres.

On Wednesday, Mr Byres expanded on his comments when addressing the Financial Review’s Banking and Wealth Summit in Sydney.

According to ABC News, Mr Byres warned that APRA was considering its longer-term position on financial stability and prudent lending practices, with housing again set to be a focus.

“A longer term and more strategic response will involve a review, during the course of our work on ‘unquestionably strong,’ of the relative and absolute capital requirements for housing exposures,” the APRA Chairman said.

Meanwhile, on Monday, the AFR wrote that ASIC chairman Greg Medcraft intends to target lenders and brokers that are encouraging borrowers to take on riskier and “more expensive” interest-only loans and lenders that have understated living expenses of borrowers when assessing their ability to afford a loan.

“We want to make sure we don’t have a surge in defaults when rates go up, and the misery that comes with that,” Mr Medcraft said.

Mr Medcraft said that he witnessed the trauma in the months before the US housing market collapse, and he fears an increasing number of local borrowers are “in over their heads.”

Adding his voice to the chorus, RBA governor Philip Lowe bluntly warned on Tuesday that soaring housing prices were lifting the household debt-to-income ratio, which was already at a record high earlier this year, reported The Australian.

“Too many loans are still made where the borrower has the skinniest of income buffers after interest payments,” Mr Lowe said. “In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong.”

In his most strongly-worded statement on the mortgage market in recent memory, Dr Lowe said lenders need to ensure the serviceability metrics they use are appropriate for current conditions.

He also called for a reduced reliance on interest-only housing loans in the Australian market.

Almost 40 percent of mortgages approved in the past year have not required the scheduled repayment of even one dollar of principal in the first years of the loan, only interest payments, which unusual by international standards, Dr Lowe said.