The prudential regulator says banks have become stricter when assessing borrowers' capacity to repay loans after it dialled up supervision last year in response to rampant house price growth, but need to improve standards even further to safeguard the financial system.
On Friday morning, Australian Prudential Regulation Authority chairman Wayne Byres said supervisory work on lending standards for housing will continue in 2016. "Housing lending continues to grow at a solid rate – around 7 per cent per annum – but there is a compositional shift occurring as investors are less prominent and owner-occupiers account for a greater share of new lending," he told the House of Representatives Standing Committee on Economics.
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"Importantly from our perspective, serviceability assessment standards have improved across the industry, although we still have further work to do to ensure improved lending policies are fully implemented, monitored and enforced."
In a speech to Macquarie University's Financial Risk Day in Sydney, APRA general manager Heidi Richards said APRA's "deep dive into lending standards has accompanied a significant change of practice by ADIs throughout 2015. ADIs have made tangible progress in meeting APRA's expectations in this area, although there is still further work to be done."
APRA revealed in a new Insight publication on Thursday that "debt serviceability assessments now appear to be both more prudent and more consistent" across the banking sector compared to December 2014, when APRA wrote to banks warning them to tighten their lending standards.
APRA has also provided more detail on its timeline for responding to the financial system inquiry, which Macquarie analyst Victor German said appeared to have extended the time frame to build capital levels.
"On balance we view this announcement as a positive for the sector as it removes the near-term risk of material increases in capital requirements," Mr German said.
Fitch Ratings said on Friday afternoon APRA's position reinforces its view "that regulatory developments over the next two to three years will strengthen the Australian banking system".
"We continue to believe capital requirements for Australian banks will be raised, although the increase is likely to be gradual. This should enable banks to meet the new requirements through internal capital generation," Fitch said.
APRA said on Thursday it had conducted a "hypothetical borrower exercise" in early 2015, and again later that year, to compare the levels of due diligence of mortgage borrowers across various banks. The results show that between December 2014 and September 2015, 14 out of 20 banks surveyed increased the interest rate against which they assess whether borrowers can service their debt.
Several banks are also applying larger discounts to less stable sources of income, such as overtime, bonuses, commissions, investment dividends and rental income when assessing borrower income, APRA said, and are now scaling their assumptions about living expenses in line with income.
With the Basel Committee on Banking Supervision committing to finalise by the end of this year changes to bank credit and operational risk models, including moves to reduce risk-weight variability between big and small banks, APRA said it "intends to take a measured approach towards implementing these changes, with suitable adjustments for the Australian context".
It said reforms would have a greater impact on big banks and "given the international work is unlikely to conclude before end 2016, and with many implementation dates yet to be agreed, APRA's domestic consultation is unlikely to begin before 2017, with local implementation of these reforms following over a number of years".
Mr German said this indicated the timeline for implementations had been pushed out to 2017 with a multi-year implementation period. "At face value it appears that banks will have more time to build their capital positions and perhaps even look to run smaller DRPs in a low growth environment," he said in a note to Macquarie's clients.
The Basel Committee secretary-general Bill Coen will address The Australian Financial Review Banking and Wealth Summit in Sydney on April 5 and 6 on the next steps for Basel regulation.
Mr Byres said on Friday Australia continues to benefit from a sound financial system.
"Financial market developments are certainly something we are keeping a close eye on, and there are no grounds for complacency given the global outlook, but the volatility in equity markets and increases in credit spreads in recent months are well within the capacity of the Australian financial system to handle without any significant stress."