Crackdown Improved Australian Banks' Mortgage Lending Standards, Regulator SaysBy
Regulator holds banks’ counter-cyclical capital buffer at zero
APRA has taken steps in recent years to curb property loans
Australian banks have “appreciably improved” their mortgage-lending standards, the nation’s regulator said, as it left the amount of additional capital banks are required to hold as a buffer against the build-up of credit risk at zero.
The pace of lending to property investors is currently at around half of the regulator’s recommended levels, and higher-risk mortgages -- such as those with loan-to-value ratios of over 90 percent -- had fallen, the Australian Prudential and Regulatory Authority said in its annual report on the operation of the counter-cyclical capital buffer.
APRA has intervened multiple times in the last few years to curtail real estate lending after growing concerned about surging loans for property investment amid rapidly increasing home prices. Measures included setting a limit of 10 percent on the pace of loan growth by banks to investors and introducing new requirements on how the lenders should assess loan affordability.
“In 2016, APRA maintained its focus on reinforcing and improving sound lending standards,” the regulator said. “In response to this, APRA believes the industry has appreciably improved its residential lending standards.”
The counter-cyclical capital buffer is a tool that the the regulator can use to require the banks to hold more capital at times when it judges that excessive credit growth could lead to higher systemic risk. It can also be reduced in times of stress to help ensure credit is not suddenly shut off.
While that framework applies to all forms of credit risk, the regulator’s focus has been on residential mortgage lending, which accounts for between 40 percent and 60 percent of the big banks’ balance sheets.
Last year, the largest lenders from Commonwealth Bank of Australia to Westpac Banking Corp. substantially reined back their lending to foreign investors, essentially cutting off those who were reliant on overseas incomes. Still, prices in the country’s biggest cities continued to increase, rising at the fastest pace in seven years in 2016, data from CoreLogic Inc. released two weeks ago showed.
Fitch, which in December lowered its Australian bank sector outlook to negative, reiterated in a report published on Monday that it sees the property market as a “key risk” to the banking industry.
Among the concerns cited by the ratings company were a looming oversupply of new apartments and the fact that interest-only mortgages accounted for 39 percent of all residential mortgages in September 2016.