‘Heavy lifting’ on lending standards largely over: APRA chairman

The “heavy lifting” in relation to repairing banking standards and lending restrictions is largely over, says prudential regulator.

APRA chairman Wayne Byres. Picture: Adam Yip.

Large-scale overhauls of banking standards and lending restrictions are drawing to a close, according to prudential regulator chairman Wayne Byres, who says the “heavy lifting” on lending standards has “largely been done”.

While not declaring victory over improving the lacklustre standards and practices in the Australian banking sector, Mr Byres told an economists lunch that any further tightening in lending standards was “expected to be at the margin” of ensuring higher quality checks of borrower expenses and debts.

Despite reams of evidence presented to the royal commission of mortgage fraud, bribery, false documentation, failure to verify customer income and not assessing expenses in the sector, Mr Byres bucked expectations by not unveiling any new measures to be imposed on the $1.7 trillion mortgage market.

“While there is more ‘good housekeeping’ to do, the heavy lifting on lending standards has largely been done,” Mr Byres said. In particular, banks were asked to keep their focus up on assessing borrower debt and expenses, and to tighten lax procedures relating to heavily indebted borrowers and customers sold loans who did not comply with usual requirements.

Mr Byres said the banking sector was well prepared for any economic crisis, although many banks had further work to do on preparing plans for the outbreak of a downturn.

“It might be sunny today, but financial storm clouds and strong winds will arrive at some point,” Mr Byres said. “It’s better to prepare for stormy weather well before a storm hits.”

In April, the Australian Prudential Regulation Authority scrapped the 10 per cent annual growth cap on lending to investor borrowers, claiming banks had improved their lending standards.

The further signalling of a lighter regulatory presence in the banking sector comes amid analyst concerns of a looming credit crunch in the Australian economy. Official statistics recently showed borrowing for the housing market fell to its slowest rate in five years, and tighter lending standards and restrictions on investor and interest-only borrowers, and revelations of careless standards during the royal commission, have been singled out as culprits.

Mr Byres said the impact of the regulatory activity on the flow of credit in the economy was “difficult to tell”. He said total housing lending was only “marginally below long-run averages” and that slowing credit growth was “not surprising in an environment of softening house prices and rising interest rates”.

Still, Mr Byres outlined results from APRA’s most recent stress test of the banking sector and individual banks. This was modelled on a scenario the Chinese economy imploded and caused the Australia GDP to fall 4 per cent, the local jobless rate to spike to 11 per cent and house prices tank 35 per cent. Along with this, the 13 largest Australian banks in the stress test were also tasked to deal with a coinciding scandal involved “misconduct and mis-selling” in residential mortgages.

Mr Byres said overall the bank’s remained above the capital requirement buffer throughout the imagined crisis. “However, with a note of caution,’ Mr Byres said. “Like weather forecasting, stress testing is an inexact science. Modelling in Australia is complicated by a lack of experience of significant stress and periods of high loan defaults,” he said.

Mr Byres said banks now had to improve their crisis plans for stripping themselves of assets and ensuring capital raising initiatives would work. “In other words, they should be able to detect the first drops of rain, rather than wait and allow for this to turn into a deluge before decisions are made,” he said