APRA chief warning on living expenses in crackdown on bank lending standards

The banking regulator has sounded a warning on high household debt, highlighting the risks to the economy yet again from banks’ high exposure to the mortgage market and their lending practices.

Speaking at the Australian Securitisation Forum 2017 in Sydney, the Australian Prudential Regulation Authority Chairman Wayne Byres expressed his concern at the high level of household debt.

“It is no secret we have been actively monitoring housing lending by the Australian banking sector over the past few years. Throughout this period, our efforts have been directed at reinforcing sound lending standards in the face of strong competition that, in our view, was producing an erosion in lending quality just at a time when standards should be going in the other direction,” he said. 

Byres said banks had to do more to improve serviceability measures, particularly in relation to the "assessment of living expenses and the identification of a borrower’s existing debts".

He said high loan-to-income mortgages are more prevalent in Australia than in other similar countries, such as the UK and Ireland.

Byres pointed to an environment of "heightened risk" as the banking watchdog increases its scrutiny of lending standards of banks.

For context, Byres compared the situation with the UK and Ireland markets. 

“High LTI (loan-to-income lending) in Australia is well north of what has been permitted in other jurisdictions grappling with high house prices and low interest rates such as the UK and Ireland," Byres said.

He said APRA’s key focus will be to ensure housing borrowers are given loans they can realistically service.

“Housing loans represent over 60 per cent of total lending within the banking sector. Our goal has been to ensure APRA-regulated lenders are making sound credit decisions which are appropriate, individually and in aggregate, in the context of broader housing market and economic trends.”

Interest-only lending fell to 23 per cent of total new lending for the quarter-ended September from its earlier 40-50 percent share. Forecasts for the December quarter “suggest something similar again”, added Byres.

However, he highlighted the higher non-performing loans.

“The trend in non-performing housing loans is upward, despite a relatively benign environment for lenders. With historically low interest rates and an unemployment rate that for the past few years has drifted lower, an a priori expectation might have been for non performing housing loans to return to lower levels.”

On new non-ADI lender rules, Byres said APRA would seek to collect data from non-ADI lenders to track aggregate trends in lending activity but not supervise individual lenders. 

“‘Indeed, we are keen to distance ourselves from any perception we are responsible for the activities of any individual non-ADI lender, or for protecting their investors. To be absolutely clear, we have no intention of taking on that role … Our focus is very much on the aggregate.”

Admitting its bigger “interventionist” role in the recent past, Byres said “the net impact has clearly been positive for the financial system: as risk within the lending environment has increased, our actions have helped to strengthen lending standards to compensate”.