A few weeks ago Australia’s central bank, as part of its quarterly Financial Stability Review (FSR), admitted that lending standards across the nation’s banking had slipped more than they thought.
They also said that this had only been picked up because of recent investigations by the banking regulator, known as APRA, on individual institutions.
Worse still, the central bank said standards had slipped so far that institutions had not only undershot the regulator’s expectations, but some may have breached their responsible lending obligations.
Here’s the RBA from mid-October:
Recent investigations by regulators have revealed that housing lending standards in recent years have been somewhat weaker than had originally been thought (though still better than in the years leading up to the global financial crisis). In some cases, practices have not met prudential expectations, potentially placing lenders at risk of breaching their responsible lending obligations under consumer protection laws.
Now, a few weeks later, RBA deputy governor Philip Lowe has provided an example of just how far lending standards had slipped at some Australian financial institutions.
As part of a panel in Sydney earlier today, Lowe presented the chart below.
It reveals the amount of outstanding credit extended to housing investors, based on reporting provided to APRA from Australian lenders.
You might be wondering why the line keeps on moving higher.
Here’s Lowe with the explanation:
Over the past six months there have been very large upward revisions to the value of investor loans outstanding, with offsetting downward revisions to owner-occupier loans. Material revisions have been made by more than 10 institutions, including two of the largest lenders. The scale of these revisions can be seen in (the chart), which shows the stock of investor credit outstanding as reported in each of May, June and September this year. The cumulative effect of the upward revisions has been to increase the stock of investor credit outstanding by around $50 billion, or 10 per cent. According to these new data, investor loans now account for 40 per cent of total housing loans outstanding, not the 35 per cent reported earlier in the year.
And the reason for these upward revisions? Because of closer scrutiny by APRA of the loan books of lenders. Yes, lenders incorrectly classifying loans, whether by accident or otherwise, led to the amount of outstanding investor loans being understated by a mere $50 billion.
Lowe, understandably, is concerned.
“While the reasons for some of these earlier errors have been identified, in other cases the reasons are unclear and lenders have not been able to provide comprehensive back data,” he stated in his address.
“As lenders have looked more closely, what they have found has surprised and, to some extent, concerned us.”
Lowe is unlikely to be the only one.
It’s not difficult to see why APRA has been cracking down on the banking industry in recent weeks.
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