By Scott Murdoch
SYDNEY (Reuters) -Australia’s banking regulator has warned the country’s major banks not to reduce lending standards at a time of lower interest rates to win mortgage market share in the country’s increasingly competitive home-lending market.
A new report from the Australian Prudential Regulation Authority (APRA) found Australia’s banks and superannuation funds could withstand a year-long financial market shock and operational disruptions.
APRA ran its first system-wide stress test to study how the tightly linked financial system would fare during severe yet plausible shocks from geopolitical conflicts, inflation, climate change and cyber threats, among others.
It warned the major banks, though, that lending standards, especially in mortgages, had to remain high to help the financial sector remain in good shape if a system-wide shock was to occur.
APRA said high household debt was a key vulnerability of the Australian financial system.
“For example, if lower interest rates, which tend to increase borrowers’ demand for loans, coincided with a deterioration in lending standards, this could lead to a rise in risky lending,” the APRA report said.
“Household debt may increase further, and some households may struggle to manage their repayments. If an economic shock occurred in that environment, this could result in higher default levels and credit losses for banks.”
APRA said housing investor credit growth had risen to its fastest pace in a decade, which meant some borrowers could face trouble if a financial market shock was to occur.
The value of new investor loans rose 18.7% in the September quarter compared with the same time last year, which meant there were nearly A$40 billion ($25.93 billion) in new mortgages taken out by investors in that time, according to official data.
Competition in Australia’s $1.6 trillion home-lending market has soared in the past year, as banks have pared back associated businesses like wealth, advisory and overseas expansion plans to focus on mortgages.
The largest lender, Commonwealth Bank of Australia, reported 6% growth in its home-lending book to A$664.7 billion in its financial year ended June 30. The others reported around 5% growth in their financial year ended September 30.
($1 = 1.5427 Australian dollars)
(Reporting by Scott Murdoch; Additional reporting by Himanshi Akhand and Roushni Nair in Bengalaru; Editing by Leslie Adler and Jamie Freed)
Comments