It’s not difficult to see why Australia’s prudential regulator, APRA, has been cracking down on Australia’s banking industry lately.
In its quarterly Financial Stability Review (FSR), released this morning, the Reserve Bank of Australia (RBA) said lending standards across Australian banking have slipped more than anticipated and that this has only been revealed because of APRA’s investigations into individual institutions.
Worse yet, the RBA said that standards have slipped so far that institutions have not only undershot APRA’s prudential expectations but some may have breached their responsible lending obligations.
Here’s the RBA:
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.
That’s damning. And it’s reasonable to assume some bankers are having very uncomfortable conversations with the regulators and other relevant authorities responsible for ensuring such lending obligations are enforced.
The RBA went further saying, “poor documentation and verification by lenders in many instances suggests that some borrowers may have been given interest-only loans that were not suitable for them.”
Other aggressive practices around serviceability by lenders had also been applied to make borrowers look like a better risk than a more prudent approach would have shown.
The RBA says standards have been tightened “across the residential mortgage market over recent months in response to this regulatory scrutiny”. No self regulation here, just a response to and result of APRA’s efforts.
But, according to the RBA, that’s timely because the scrutiny and the changes come “at a time when risks in the housing market are already heightened, interest rates remain at historic lows, and competition in the owner-occupier lending market remains strong (especially as lenders focus less on investor loans).”