Speaking at an Australian Business Economists lunch in Sydney on Wednesday, APRA chairman Wayne Byres explained why there has been increased policy changes by lenders around the verification of customer expenses and incomes.
“One of the things I think the industry was slow to respond to was, within the credit assessment process, you’re actually trying to do a forecast,” Mr Byres said.
“You’re interested in the borrower’s expenses today because they give you a forecast of what they are likely to be in the future. You’re interested in the borrower’s income today because you want to know what it is on day one, but you also make assumptions about how it might grow over time.”
The APRA boss said that the “whole objective” of capturing the income and expense data of a home loan applicant is to try and forecast that they “have reasonable prospects, given all the ups and downs you go through in a life cycle, to continue to pay that loan.”
Mr Byres explained that in previous years, banks had much lower interest rate buffers that they had to factor in as they were reassured by rising incomes.
“The banks implicitly assumed much higher rates of income growth than we have seen over the last few years,” the chairman said.
“Banks used to be on the implicit assumption that your income would grow 4 to 5 per cent a year. That’s not happening to people now.”
Given the current environment of low wage growth, which Mr Byres believes will continue for some time, banks have been forced to use bigger interest rate buffers as compensation.
“The income growth is actually much lower than an implicit assumption in many policy settings at the moment,” Mr Byres said.
Regulator addresses critics
APRA’s macro-prudential curbs have divided opinion since they were first introduced in 2014. Mr Byres acknowledged that some of the smaller banks had criticised the regulator for delivering an unfair set of rules.
“One of the criticisms that we have suffered when we impose things like the investor lending limit or benchmark and the interest-only benchmark was from the smaller end of the industry, who said they had no impact on systemic risk,” the chairman said.
“They wanted to know why we were applying these measures to them.”
APRA was concerned that if it only focused on one sector of the market, such as curbing investor lending for the major banks, borrowers would simply concentrate on another corner of the market.
“We’ve been alert to that. The risk remains that it concentrates outside the banking system,” Mr Byres said.
“At this stage, our view is that the risk is not sufficiently material that we would want to do anything about it, but it is something we are keeping an eye on. Particularly as some of those non-bank lenders are still funded in some shape or form, for some period of time, by the banks.”