Banks Should Not Let Lending Practices Slip: RBA

A man and a women walk into the Reserve Bank of Australia headquarters in Sydney, Australia, on May 5, 2015. Mark Metcalfe/Getty Images

The Reserve Bank of Australia (RBA) has warned banks not to let lending standards fall as the financial sector could be shaken from any debt blow out under a housing price correction.

In its biannual financial stability review (pdf), the central bank stressed the importance of the financial sector avoiding excessive risk-taking in the form of looser lending standards or relaxation of internal limits.

“Even if lenders do not weaken their own settings, increased risk-taking by optimistic borrowers could see a deterioration in the average quality of new lending,” the review said. “This would weaken the resilience of businesses and households, and so the financial system, to future shocks.”

It warned that a sustained period of rising prices could lead to “over-exuberance” and “extrapolative expectations which could cause a weakening of lending standards could weaken, causing prices to be pushed above their actual values.

“A correction in asset prices, if borrowers’ income were to fall, and so they defaulted on debt repayments, would expose lenders to large losses on the increased debt, particularly if the quality of that debt had been eroded,” the report wrote.

This, the RBA warned, could lead the financial regulators to consider responses if risk-taking in the financial sector were to increase. However, they also noted that lending standards in Australia had remained “largely unchanged” at present.

Minister of Housing Michael Sukkar reacts during Question Time in the House of Representatives at Parliament House on March 22, 2021, in Canberra, Australia. Sam Mooy/Getty Images

“On average, we’re looking at affordability being at 20-year highs, which is why first home buyers are at such high levels, and why owner-occupiers are nearly three-quarters of the market,” Sukkar told Sky News Australia. “Owner-occupiers, or people purchasing a home for themselves, are in an absolutely dominant position.”

“But of course, we keep a very close eye on these things. We want as many Australians as is possible to be able to purchase their first home if that’s what they aspire to do,” he said.

The review also warned that there would likely be an increase in short-term financial stress as several financial support measures, including JobKeeper and the home loan deferral scheme, have ended. But noted that despite this situation, the vast majority of households and businesses who were on deferred payments were back on full repayments.