As banks are taking more risks in their lending to capture the low interest rate $1.3 trillion mortgage market, it has sparked more warnings to banks to be wary.
The guidelines are aimed at keeping lenders prudent and offer guidance on its expectations of boards, remuneration, credit policies and stress testing.
Chairman of the Australian Prudential Regulation Authority (APRA) John Laker told The Age there has been an increase in higher-risk lending, and they have released new draft guidelines laying down their expectations of banks.
“In this environment, APRA is seeing increasing evidence of lending with higher risk characteristics and it does not want this trend to continue,” he said.
“The draft prudential practice guide reinforces the importance of maintaining prudent lending standards when competitive pressures may tempt otherwise.”
The APRA guidelines warned banks to be careful when increasing incentives paid to brokers because it can affect loan quality.
“Trailing commissions are more likely to provide incentives for brokers to retain and monitor customers,” the guidelines state.
The guidelines also put high loan-to-valuation ratio (LVR) loans on the agenda, stating it expects banks to monitor closely how many of these they give out.
Australian law doesn’t require any caps on LVRs, but APRA said any loans over 90 per cent LVR exposed banks to exceptionally high risk.
It’s the current economic conditions of lengthy economic growth, low interest rates and sustained house price growth that has APRA worried and warning against complacency from residential mortgage lenders.