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Australia completes tightening of property loan standards

Results of stress test are reassuring, says banking regulator Australian Prudential Regulation Authority


A THREE-YEAR project to improve Australian mortgage lending standards is almost complete, the results of a stress test are reassuring, and loan rules will not be tightened much more, the banking regulator said on Wednesday.

The test, which included modelling for a 35 per cent fall in property prices, provides "general reassurance" that the banking system is sound, Australian Prudential Regulation Authority (APRA) chairman Wayne Byres said in a speech in Sydney. Introduction of centralised credit reporting this year is expected to help lenders limit loan sizes based on existing debt-to-income ratios rather than just income.

"While there is more 'good housekeeping' to do, the heavy lifting on lending standards has largely been done," Mr Byres said. "Any tightening from here on is expected to be at the margin as banks seek to get a better handle on borrower expenses, and better visibility of borrower debt commitments." Alarmed that a fight for market share was eroding lending standards, APRA has progressively ramped up lending curbs since late 2014. Restrictions on riskier loans, such as interest-only mortgages, and an increasing focus on expense and existing debt verification has contributed to a notably cooling market. Prices have fallen for nine straight months, with the biggest drops in expensive markets such as Sydney where affordability is most stretched and investors no longer see good prospects for capital gains.

While APRA remains alert to slippage, overall it has seen "clear improvements and moves to better practice," Mr Byres said.

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A stress test conducted in 2017, the results of which were published for the first time on Wednesday, suggests that lenders could withstand a severe economic downturn with house price declines of 35 per cent without breaching minimum capital requirements, Mr Byres said. The projected credit loss rate was "slightly lower" than APRA's 2014 test, which partly reflects recent improvements in asset quality, he said.

The regulator modelled a scenario where a downturn in China led to the collapse of commodity prices and Australian gross domestic product fell 4 per cent. The nation's unemployment doubled and house prices fell 35 per cent over three years amid a temporary closure of offshore funding markets. It also added operational risk losses from a misconduct and mis-selling of mortgages.

Overall banks projected credit losses of around A$40 billion (S$40.2 billion) on their residential mortgage books, which Mr Byres said was "broadly consistent" with loss rates seen in the UK's 1990s downturn, though lower than seen in Ireland or the US in the financial crisis.

Despite the severity of the crisis, no bank reported a tier one capital ratio below 5 per cent at the lowest point and most maintained liquidity coverage ratios, Mr Byres said. In normal times, APRA expects the nation's biggest banks to operate with capital ratios of above 10.5 per cent. Unlike in other countries, Australia does not publish the performance of individual banks in stress tests. BLOOMBERG.

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