The prudential regulator has revealed that strong competition between mortgage providers was driving lending to "horribly low levels" before APRA intervened.
Appearing before the Senate Economics Legislation Committee in Canberra yesterday, APRA chairman Wayne Byres said the regulator was “a bit surprised” by how much competitive pressures in the banking industry had led lenders to do things that were “lacking in common sense”.
Commenting on APRA’s decision to implement a 10 per cent speed limit on investor credit growth, Mr Byres reiterated the competitive implications that had eroded lending standards.
“The whole issue started because competition was driving standards to a horribly low level,” he said.
APRA wrote to banks in December last year to reinforce the importance of maintaining sound standards in an environment of heightened risk.
“As foreshadowed in our letter, we spent the first half of 2015 engaging with ADIs (particularly the largest lenders) on their lending policies and growth aspirations, in order to assess whether they were prudently managing the risks within the current environment,” Mr Byres said.
“In many cases, this led to ADIs making changes to their lending policies and growth aspirations to ensure that sound practices were being maintained.”
Mr Byres said many of these changes have only recently come into effect.
“So we are watching carefully to see how they play through the system,” he said.
“Based on the latest available data, the rate of growth in credit for housing is, in aggregate, still accelerating. However, within this there is a compositional switch underway, as a moderation in the growth in lending to investors has been offset by somewhat stronger growth and more competition in lending to owner-occupiers.”
In such an environment, Mr Byres said, APRA remains “very alert” to any sign of deteriorating credit standards, and is monitoring those ADIs that were identified as needing to strengthen their lending policies to ensure they do indeed do so.