Home News RBA emphasizes the need to focus on lending standards

RBA emphasizes the need to focus on lending standards

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The Reserve Bank’s head of financial stability Luci Ellis said that regulators should intensify their focus on bank lending standards to make sure that property meltdowns are avoided. She also downplayed the chances of a lift in borrowing rates with the nation losing its AAA credit rating.

“Countries that have experienced sovereign downgrades from where we are to the next level down generally don’t see much of an effect on prices, given everything else,” Ellis said. “Often the ratings downgrade is a validation of what the market already thought.”

The senior bank official also reiterated that bank asset quality matters more than quantity. “For that reason, good lending and borrowing habits are more important to instill than a policy approach centred on a few numbers,” she said. 

Ellis’ comments are essential amid investor concerns that the Big Four banks--ANZ, Westpac, National Australia Bank, and Commonwealth Bank--may be forced to raise up to $30 billion next year to meet the Basel IV reforms. The banks are resisting raising more capital as it would reduce returns. However, the Australian Prudential Regulation Authority said last week that forthcoming international policy developments mean that banks should continue raising capital.

Regulators can help by focusing more on the quality of loans being written.

“If the banking system maintains sound underwriting standards at the level of the individual loan, we can have some confidence that the aggregate outcome is also sound,” Ellis said.

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