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The Reserve Bank has warned banks against cutting lending standards as prices of assets, including houses, are pushed higher by cheap debt, saying the measure could leave households and businesses more vulnerable to future shocks.
Despite the warning, however, the central bank said lending standards of Australian banks remain prudent and the looming rise in bad debts and insolvencies will be much more modest than feared last year.
The Reserve Bank is keeping a watchful eye on the surging property market.Credit:Louie Douvis
The RBA’s Financial Stability Review on Friday reinforced its recent commentary that while it is closely watching the surging property market it does not believe that credit standards of the banks have slipped.
The review said that the financial system had been resilient to the COVID-19 shock and Australia’s banks were in a strong position. However, it added that the ultra-low level of interest rates created the risk of excessive borrowing.
It said there was a global risk that a sustained period of rising asset prices could lead to “over-exuberance and extrapolative expectations” including increased used of debt. These risks were greater for leveraged assets, including houses.
“In an environment of accommodative financial conditions with rising asset prices it is particularly important that there is no excessive risk-taking by the financial sector,” the RBA said.
“Increased risk-taking could take the form of looser lending standards for individual loan assessments, or a relaxation of internal limits on the share of riskier loans they make.”
“Even if lenders do not weaken their own settings, increased risk-taking by optimistic borrowers could see a deterioration in the average quality of new lending. This would weaken the resilience of of businesses and households, and so the financial system, to future shocks.
Australian house prices are rising at their quickest pace since the late 1980s, prompting some economists to predict it is a matter of time until regulators intervene to slow the growth. The RBA said house prices were rising globally, but few countries had intervened to address the risks.