RBA's Philip Lowe says bank lending has become too cautious

RBA governor Philip Lowe has suggested banks were becoming too cautious in their lending, in a speech that signalled he viewed lending as having gone from too easy to too tight.

A percentage of borrowers will always end up in financial strife and be unable to meet their obligations, Lowe said in his speech entitled “Trust and Prosperity”. 

“We need banks to be prepared to make loans in the full expectation that some borrowers will not be able to pay them back.”

“Banks need to take risk and manage that risk well. If they become afraid to lend simply because of the consequences of making a loan that goes bad, our economy will suffer,” he said.

Lowe’s comments were at the Committee for Economic Development of Australia (CEDA).

Lowe’s speech further noted the banking royal commission along with the five years of flat wages had been damaging to trust in Australia. 

“Flat real wages are diminishing our sense of shared prosperity,” he said.

“The lack of real wage growth is one of the reasons why some in our community question whether they are benefiting from our economic success.”

“It is clear that the behaviours highlighted by the royal commission have dented the community’s trust in parts of our financial sector,” Mr Lowe said.

“Strong penalties can play an important role in incentivising good behaviour, and this is an area we should be looking at.” 

Columnist Robert Gottliebsen recently wrote that Australia is going through a credit squeeze without precedent following a period when bank credit standards have been too low.

"The banks have been told to raise those standards, which effectively cuts at least 20% from what they would loan on a property," he wrote in The Australian.

He then added there were also "the unconventional credit clamps... like a cancer growing below the surface, and no one’s talking about them".

Gottliebsen noted that bank managers were under attack at the same time as a credit squeeze - "so a strange new inner fear had developed among banking people at all levels as regulators are set to walk into banks to check what they are doing".

In July Wayne Byres, who heads up the Australian Prudential and Regulatory Authority (APRA), suggested it was important that the concept of caveat emptor (buyer beware) remains in the system. 

“Regulators cannot be everywhere overseeing everything. It is important the community understands that.”