The Sydney Morning Herald – August 30, 2014
Not only is the housing market the talk of the nation, it looms as a major issue for the high-powered financial system inquiry – with banks, consumer groups, regulators and non-bank lenders all butting heads over how much scrutiny the sector needs.
While banks are resisting calls for more regulatory scrutiny, consumer groups say Australia should consider placing restrictions on loans with a high loan-to-valuation ratio – similar to a move in New Zealand.
The inquiry, lead by former Commonwealth Bank of Australia boss David Murray, is examining the banks’ growing exposure to the residential mortgage market as part of its sweeping review of Australia’s financial system.
In a second and final round of submissions to the inquiry, the big four banks said there were already enough protections in place to prevent any systemic shock spreading through the financial system as a result of a housing crash.
And the Reserve Bank warned, in its own submission, that moves to boost competition in the home loan sector could increase risk in the financial system.
Regional banks, credit unions and building societies have been urging the federal government to change regulations that give the big banks a significant cost advantage when making home loans.
But the RBA’s submission flagged concerns that policies to boost competition in home loans could come at the expense of financial stability.
The ANZ said the housing market was already closely watched by regulators and received significant management and board focus. The bank adopted a prudent approach to home lending and closely managed risks under the supervision of the banking watchdog the Australian Prudential Regulation Authority, it said.
It also noted that assets “other than residential mortgages” were most likely to be affected by an economic downturn, and warned that “inappropriate policy” could significantly impact “economic growth, stability and the interests of borrowers and home owners”.
But consumer group Choice said further consideration of restrictions on risky home lending would be welcomed, particularly with loans advertised as “no deposit”, “low deposit” or “family guarantee”.
Any new restrictions would need to be policed by a properly funded regulator, Choice said.
The ANZ said it currently ensured customers could cope with a 2.25 per cent interest rate, suggesting it did not factor in any expected rate rises in customers’ ability to repay mortgages.
In the six months to March, its average home loan was $345,000 and the average loan-to-valuation ratio was 71 per cent.
ANZ chief executive Mike Smith said the implementation of global reforms, such as Basel III, and the regulator’s new framework for domestic systemically important banks had improved stability.
“There has been a significant strengthening of the Australian financial system since the GFC,” he said.
Westpac’s submission to the inquiry also rejected Mr Murray’s suggestion that growth in the housing market posed system risk to the financial system.
It said there were “clear factors” that indicated systemic risk was present in the US system in the lead-up to the global financial crisis – and these were not present in Australia.
It also said Australian banks’ mortgage portfolios were diversified and low-risk, and regulatory settings were conservative.
The big four banks control 80 per cent of the $1.3 trillion mortgage market, and home loans account for about 60 per cent of the entire banking system’s portfolio – up from 50 per cent 20 years ago.
The CBA said the banks’ exposure to residential lending in fact contributed to the stability of the financial system. This was because of strong population growth and the fact that housing investment over the past decade had been relatively moderate compared with other OECD countries, it said.
APRA has not recommended any further measures to reduce the impact of a potential housing crash on the financial system.
However, it said continued vigilance by regulators was necessary, such as active monitoring of credit quality, regulator stress-testing of banks and scrutiny of lending standards.
The Mortgage and Finance Association of Australia said it was also important the government regularly intervened in the residential mortgage-backed securities market.
“Canada has proven it can be managed without risk to taxpayers and without the creation of moral hazard,” it said.