Bor­row­ing ca­pac­ity to come un­der scru­tiny

Kalgoorlie Miner - - BUSINESS - Jeff Whal­ley

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.

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