RBA flags ‘systemic risk’ of home lending

The Reserve Bank has warned of the potential risks of directing any more finance towards housing in its latest submission to the Murray Inquiry.

While residential property in Australia is “generally not a particularly risky asset”, its size and interconnectedness with the financial system posed “a systemic risk”, the RBA said.

In its interim report, the Murray Inquiry raised a number of options to boost competition in the mortgage market including potential changes to the amount of capital banks hold against mortgages.

The RBA believes that if implemented, these options could lead to an increase of housing finance.

“These options should be assessed in terms of the end benefits and risks for consumers and the broader economy,” it said.

“Relevant considerations include whether the policy change might accelerate household borrowing, and the associated implications for systemic risk and the available funding for Australian businesses.”

In addition, the RBA highlighted the risks of any long-term government support for RMBS following requests for further information from the Murray Inquiry.

In recent weeks Professor Stephen J Brown of NYU Stern School of Business warned that high LVRs and an RMBS market in which issuers have “no skin in the game” pose potential threats to the Australian financial system.

In an interview with the Centre for International Finance and Regulation (CIFR), Professor Brown made parallels between the current state of the Australian banking system and that of the United States before the financial crises.

“The banking system in Australia is a concern,” he said, observing that Australia has one of the largest RMBS markets in the world outside of the United States and that by international standards LVRs are “extremely high”.

During the June quarter, a rise in the total assets of Australian securitisers of 2 per cent was due to an increase in residential mortgage loans, up $3.4 billion or 3.3 per cent, according to the Australian Bureau of Statistics.

Professor Brown noted that the failure of the RMBS market in the US was held to be a major factor behind the GFC.

All of the factors that were precursors to the US financial meltdown exist in Australia today, he said, including ‘too big to fail’.

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