APRA Warns of Dangerous Lending Practices

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April 11th, 2016
Risky home lending practices and high levels of household debt are raising concern in Australia, with the chairman of the Australian Prudential Regulation Authority (APRA), Wayne Byres, saying conditions are "eerily similar" to the period before the global financial crisis. New concerns are being raised after the release of a leaked APRA report from 2007 that warned of dangerous lending practices at the time. While conditions in 2016 are much improved thanks to tighter lending standards, the intensity of the property boom has exposed Australia to potential domestic and global shocks.

The secret APRA report from 2007, which was never published, analysed tens of thousands of loans from 2006 before warning of potential impacts due to lower lending standards. According to the report, banks were lending 3.4 times more loans than they could have under previous rules, a situation that led directly to unsustainable lending practices. In a recent interview with the ABC, Mr Byres spoke of the many similarities between conditions now and the period leading up to the GFC.

While Mr Byres acknowledged the banking regulator had tightened lending standards since 2007, he also said "We shouldn't kid ourselves that the worst of the problems elsewhere couldn't occur here or that there hasn't been a healthy dose of luck involved." According to Byres, "I don't think the issues were all that different but, broadly speaking the issues that were on the radar screen then - buoyant housing lending, commercial property lending standards - are all things that are on our agenda again... This time around we've been a bit more active and interventionist maybe than we were last time, but I don't think the issues have particularly changed that much.”

A number of changes have been made since 2007, however, with the banking regulator having tightened lending standards around property investment and forced the largest banks to hold more capital as reserves against potential bad home loans. In particular, APRA has written to banks to warn that it will look very closely at any institutions where investment housing loans are growing faster than 10 percent per annum.

Despite new regulations, the level of mortgage-related debt in Australia is at even higher levels than before the GFC. Australia is one of seven countries that Forbes magazine says is the "most likely to suffer a debt crisis" within the next three years, with private debt exceeding 1.5 times GDP and the level of this debt having grown by 20 percent over the last five years. Australians now owe around $2 trillion in unconsolidated household debt, with all this debt leaving the nation open to big problems if global conditions change for the worse.

According to Byres, "We can't be complacent. After 25 years of economic expansion, it would be a surprise if the banking system wasn't in good shape... But, put simply, when adversity arrives - and at some point it will - we want the banking system to help alleviate rather than exacerbate problems. Ideally it's a shock absorber not an amplifier." According to Former Treasury secretary and current National Australia Bank chairman, Ken Henry, "A meltdown of the global financial system... remains a risk for Australia and our best protection is a strong public sector balance sheet, that's our best protection."


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