A new wave of macroprudential tightening could be on the way focusing on loan serviceability.
UBS says the Australian Prudential Regulation Authority (APRA) has been hinting at moves on serviceability and the banking royal commission has had its early focus on responsible lending and it’s building pressure on regulators to act.
Earlier moves of capping loan growth to investors and limits to interest-only home loans are reaching the end of their usefulness after being considered relatively successful and this next effort to tighten lending could be the next step for APRA.
UBS economists said in a statement that the banking royal commission and APRA were both looking at initiatives to improve lending standards.
“We believe that effectively a third phase of macroprudential policy – resulting in further tightening of lending standards – is now just underway, with the key implication of a potentially material negative impact on housing and the economy yet to bet seen,” they wrote in a note.
“Given how quickly this evolved, there is a growing risk the consensus view on the outlook (including the RBA) is under-estimating the downside risk from tightening lending standards, which is an important consideration to balance against the upside from household tax cuts and booming growth.”
APRA chief Wayne Byers says there’s concerns about the benchmarks that banks use to assess borrowers’ expenditure and that mortgages were being sold outside of APRA’s minimum loan serviceability buffers.
UBS says that the banking regulator will now intensify its focus on the banks’ knowledge of borrowers’ spending obligations, helped along later this year with the introduction of mandatory comprehensive credit reporting.
“All this suggests that APRA is now less concerned with financial sector stability than they are with financial stability for individual borrowers and households and that they are not yet done with macroprudential policy,” the UBS economists wrote.