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APRA chairman Wayne Byres told attendees at the CEDA 2017 NSW Property Market Outlook event in Sydney last Friday that there are “credit providers beyond APRA’s remit” and “a tightening in one credit channel may just see the business flow to other providers anyway.”
Mr Byres explained that the most important impact of the regulator’s macroprudential measures to date –including a 10 per cent limit on investor loans growth, higher serviceability buffers and interest-only loan caps – has been to reduce the competitive pressure on banks to loosen lending standards as a means of chasing market share.
“Of course, lenders not regulated by APRA will still provide competitive tension in that area and it is likely that some business, particularly in the higher risk categories, will flow to these providers,” he said.
“That is why we also cautioned lenders who provide warehouse facilities to make sure that the business they are funding through these facilities was not growing at a materially faster rate than the lender’s own housing loan portfolio, and that lending standards for loans held within warehouses was not of a materially lower quality than would be consistent with industry-wide sound practices.
“We don’t want the risks we are seeking to dampen coming onto bank balance sheets through the back door.”
Non-bank lenders currently receive funding through warehouse facilities provided by the big four and a number of large regionals.
Deloitte financial services partner James Hickey explained that these warehouse lines of credit are provided via the institutional arm of the major banks, rather than their retail division.
“APRA is making sure that the sound lending principles applied to the retail book are also considered by the institutional banking arm when it is setting up its warehouses for the non-bank lenders,” Mr Hickey said.
According to Deloitte partner Heather Baister, warehouse providers have strict eligibility criteria that non-bank lenders need to abide by.
“Where the banks are feeling pressured to reduce certain types of lending, they can adjust that eligibility criteria, for example, to make sure they don’t have too much exposure to certain geographical areas or to make sure they don’t end up with a greater proportion of the book being investor or interest-only,” she said.
Ms Baister said it is not in the best interests of non-banks to be absorbing certain areas of lending that the big banks will not touch.
“Large issuers will turn out RMBS deals every six or nine months. If they had a portfolio that was too heavily skewed towards risky loans, they would get penalised for that in the capital markets and struggle to raise the financing they need,” she said.
“It is not in their interest to absorb all of the areas and ramp up lending that the banks have moved away from.”