The Bull.com.au – 11 May 2015

http://www.thebull.com.au/articles/a/53880-rba-researcher-warns-on-lending-standards.html

By AAP

Future economic shocks may hit households harder than in past financial tremors, according to a Reserve Bank paper.

Credit losses suffered by Australian banks during recessions and economic crises stemmed from slack lending standards to businesses.

But the RBA discussion paper warns that high household debt means it could be different next time around.

David Rodgers, of the RBA’s Economic Research Department, sifted through data from 1980 to 2013, a period spanning the major bouts of bank loan losses in the early 1990s recession and the more recent global financial crisis.

Most of the big losses were in business loans gone bad and they peaked around the time economic growth was at its worst.

A worsening in business sector conditions like interest costs, profitability and commercial property prices was the main driver of these peaks in bank losses on business loans.

But losses varied widely between banks, with the “very worst” the result of poor lending standards, the discussion paper found.

The paper, which does not necessarily reflect the RBA’s official view, warns that this variation between banks means standard stress-testing methods, effectively looking at the average bank, may fail to identify potential losses.

One of the paper’s conclusions is that regulators should keep a closer eye on both bank lending standards and the risk profile of borrowers.

And then there’s housing.

The paper found losses suffered by banks on housing loans did not rise much even as the banks’ corporate loan books fell into disarray, but warned that might not always apply.

Future economic shocks may hit households harder, Rodgers said in the paper, published on Monday.

There have not been large, nationwide falls in prices in recent decades, while high levels of debt mean a rise in unemployment would likely have a “more severe influence” on household credit losses than in earlier times, Rodgers said.

And household lending is a larger share of bank loans these days.

“These considerations suggest that any weakening in lending standards in these areas could have a larger systemic impact than in the past,” he said in the paper.

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