ASIC CHAIR: Australia isn't in a sub-prime crisis but banks must exercise caution

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The chair of Australia’s corporate regulator is leading another review of the banking sector, amid concerns about systemic risks in Australia’s housing market.

The Financial Review reports that Greg Medcraft, chair of the Australian Securities & Investment Commission (ASIC), will focus on lenders who spruik riskier interest-only loans.

Medcraft’s review will also target lenders who miscalculate the ability of borrowers to pay their expenses for interest-only loan arrangements.

Speaking to ABC NewsRadio this morning, Medcraft said he didn’t think Australia was facing a sub-prime loan crisis on a par with what happened in the US leading up to the Global Financial Crisis (GFC).

He said that it was necessary to exercise caution now while Australia was in a low-interest rate environment to ensure that borrowers wouldn’t be under water once interest rates rise in the future.

Medcraft’s perspective is informed by his experience working on Wall Street as the GFC unfolded. He said lenders were making loans before the crash on the presumption that interest rates would stay low.

“You have these loans originated in low-interest rates and it can come back to bite hard. So lenders need to look at it now and consumers need to be aware,” Medcraft said.

ASIC will again test the veracity of income and expenses in loan applications. In a 2015 investigation, ASIC found that around 30% of loans had been issued for which incomes had been overstated and expenses understated.

Most Australian banks then took “remedial action” to enforce stricter lending standards for loans that didn’t meet ASIC’s criteria.

Medcraft cited his experience in the GFC when talking about the potential “lag effect” of borrowers falling into arrears.

He said this was one of ASIC’s main concerns in a changing interest rate environment, as the number of banks which didn’t adhere to proper lending criteria is only revealed once interest rates start to go up.

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