Borrowing capacity to come under scrutiny
Australia could face a full-blown credit crunch if the banking royal commission calls for sweeping improvements to banks’ lending standards, industry experts say.
Analysts at investment bank UBS say the banking sector is facing a period of “sustained earnings pressure” as house prices fall and after the fallout from the royal commission.
Hearings for the year-long inquiry finished last week and the industry now awaits commissioner Kenneth Hayne’s final report, due by February 1.
UBS banking analysts, led by Jonathan Mott, say the final report may recommend that retail banks be banned from using demographic benchmarks as the key yardstick to approve home loans.
To save on costs, Australia’s banks have been widely using a controversial benchmark known as the household expenditure measure, or HEM, to approve loans.
Under that system, banks assess mortgage applications based on broad demographic information — such as typical incomes in the suburb of the property being purchased — rather than assessing each borrower’s specific financial circumstances.
UBS analysts said Mr Hayne was likely to recommend the use of the benchmark be limited or banned.
They noted that, in his interim report released in September, Mr Hayne said that the benchmark, used as a default measure of household expenditure, “does not constitute any verification of a borrower’s expenditure”.
The royal commission heard that 50 to 60 per cent of mortgages were currently approved using the HEM.
If the use of the HEM was limited or banned, it would likely lead to a further reduction in the maximum borrowing capacity for many consumers, UBS said.
“This is likely to further restrict the flow of housing lending and credit growth,” Mr Mott said.