APRA right to ‘turn up the dial’ on lending standards

HSBC chief economist Paul Bloxham and ING Direct chief risk officer Bart Hellemans said APRA chairman Wayne Byres had acted appropriately for a prudential regulator when he warned earlier this week of “heightened levels of risk” for mortgage lenders.

Mr Bloxham told Mortgage Business that APRA is “turning up the dial on lending standards” because rising property prices have contributed to bringing more risk into the financial system.

“The history of Australia shows that the cause of previous issues with loan defaults was largely a result of issues with lending standards, so it’s part of their role to make sure that lending standards are appropriate,” he said.

However, Mr Bloxham added that Australia’s financial system has functioned well over the past decade and was likely to remain in sound shape.

Mr Hellemans added that Australia’s banks are well capitalised, so there is no reason to be concerned about the financial system.

One potential source of concern, however, is that Australia is facing very unusual conditions due to the combination of ultra-low interest rates, a sluggish economy and a housing shortage in some cities.

Mr Byres is therefore right to keep a close eye on the mortgage sector, Mr Hellemans said.

“He wants to make sure that the whole industry doesn’t let competitive factors push people to do the wrong thing,” he said.

“While currently default rates on mortgages are low, you don’t want to compromise on your lending standards just to grow your balance sheet.”

Mr Byres said earlier this week that lenders with aggressive practices “should fully expect to find APRA increasingly at their doorstep”.

Even though lenders might seem like big, unwieldy organisations, Mr Hellemans said lenders were capable of making rapid changes, as they had shown in the way they adapted to post-GFC regulatory changes.

“Don’t forget that APRA has a big stick, which is their ability to impose on the industry additional capital charges,” he said.

“Wayne Byres has made clear he will use that stick if the concerns of specific institutions aren’t being addressed.”