We are watching, lenders warned

AUSTRALIA’S banking watchdog has warned it is on the alert for a fall in lending standards as house prices rise.

It issued the warning yesterday after reviewing the “countercyclical capital buffer” for banks and other finance companies allowed to take deposits.

That buffer effectively dictates the amount of extra cash — on top of standard requirements — banks must set aside to bolster their resilience during high-risk periods.

The default rate is set at zero now and the Australian Prudential Regulation Authority has opted to keep it at zero “based on an assessment of the systemic risk environment”.

But it has flagged it will likely lift the default level in future as it watches for any drop in lending standards amid rising house prices.

“This is something APRA will consult on as part of the next stage of the capital reforms currently under way,” chair Wayne Byres said.

“Importantly, this would be considered within the capital targets previously announced — it does not reflect any intention to further raise minimum capital requirements.”

Low credit growth and the pick-up in the housing market were among the factors the watchdog considered in deciding to keep the rate at zero.

“Past episodes of rapidly rising house prices have often been accompanied by increases in household indebtedness and declining lending standards,” APRA said.

“Low interest rates may also give banks an incentive to increase the riskiness of their lending. APRA is carefully monitoring these dynamics but there is no notable evidence of increased systemic risk that has emerged to date.”