Best lending standards 'might not be enough': RBA

Speaking at the Australian Business Economists – Lunchtime Briefing in Sydney on 20 September, Reserve Bank of Australia assistant governor (economic) Luci Ellis chronicled the “turning point” and subsequent pick-up in the global economy.

Ms Ellis said that on the domestic front, the RBA has repeatedly pointed to the issues associated with household sector balance sheets.

The assistant governor described these issues as “a potential exacerbating factor” among broader geopolitical and financial risks that could derail an economic recovery.

“That is, if some other shock should come along, debt would make it worse,” Ms Ellis said. “Of itself, the level of indebtedness is unlikely to be a triggering factor that sparks a negative outcome. But it is an important consideration in the context of other triggers.

"The risk profile of recently originated debt has improved as a result of various actions by the regulators, the evolving risk environment and the lenders' responses. The level of debt owed matters most when the borrower is facing a large negative shock.”

Ms Ellis said that strong lending standards mitigate the effects of moderate shocks, and can help prevent a shock turning into a default event, but "in the face of a large, economy-wide shock, even the best lending standards might not be enough to protect borrowers and lenders.

"At that point, the absolute amount of debt owed becomes the binding consideration.”

Borrowing is one side of the household debt issue. Stagnant wage growth is the other. Ms Ellis said that wage growth should pick up “at some point” but added that this “could take a while”.

[Related: Banking competition 'eroded' underwriting standards: APRA]