"The heavy lifting on lending standards has largely been done": APRA

APRA’s benchmarks on investor and interest-only loans coupled with the banks’ improved serviceability assessments have lifted the overall quality of new lending, APRA’s chairman Wayne Byres said in a speech Wednesday.

“While there is more ‘good housekeeping’ to do, the heavy lifting on lending standards has largely been done. Any tightening from here on is expected to be at the margin as banks seek to get a better handle on borrower expenses, and better visibility of borrower debt commitments,” he told the Australian Business Economists in Sydney.

While APRA is satisfied with the improvements and moves to better practice, Byres said it has not been a quick, straightforward or “easy on the eye” process.

“As we ‘peeled the onion’ through our reviews and examinations of lending standards, we encountered a new layer at each step: enhanced oversight was not always translating into more prudent policies, and more prudent policies were not always translating into more prudent practices,” he said.

After APRA conducted a review of banks’ serviceability assessments in 2016, it found several areas of weakness, including their assessment and inquiries into borrower’s income and expenses.

That is changing with banks now typically requesting expenses be split amongst different categories rather than be presented as a single number. Some banks have gone beyond that by investing in further training of frontline lenders, reviewing transactional statements and monitoring reliance on benchmarks, he added.

“As others have commented, borrowers appear to make poor financial historians – let alone forecasters!” he said.

CCR will also aid in this pursuit by giving greater oversight and transparency of a borrower’s existing debt, he said.

APRA’s actions and the supply of credit
Byres noted that it’s hard to determine whether regulatory activity has affected the flow of credit because there have been a number of other factors that have impacted demand, including affordability and foreign investment rules. Total housing lending grew at around 6% in the year to May 2018, which is only marginally below long-run averages, he said.

“Credit growth appears to be slowing somewhat at the moment, but that is not surprising in an environment of softening house prices and rising interest rates.”