APRA criticises banks in mortgage crash stress test

The stress test involved two hypothetical scenarios: one involving a recession and the other a sharp jump in the official cash rate. Both included a "severe downturn" in the housing market.

APRA chairman Wayne Byres said the test found that the industry "appears reasonably resilient" to the immediate impacts of a severe downturn in the housing market.

"But a note of caution is also needed – this comes with a potentially significant capital cost and with question marks over the ease of the recovery," he said.

Mr Byres said APRA was unconvinced by the recovery planning of Australia's banks.

"In many cases, there was clear evidence of optimism in banks' estimates of the beneficial impact of some mitigating actions, including, for example, on cost-cutting or the implications of repricing loans," he said.

"The feedback loops from these steps – such as a drop in income commensurate with a reduction in costs – or increase in bad debts as loans become more expensive for borrowers were rarely appropriately considered."

My Byres said another area of concern was that the recovery plans of individual banks hadn't properly considered the emergency actions that other banks would also take in a crisis.

"For example, proposed equity raisings, a cornerstone action in most plans, appeared reasonable in isolation – but may start to test the brink of market capacity when viewed in combination and context," he said.

"The tightening of underwriting standards, another common feature, could have the potential to lead to a simultaneous contraction in lending and reduction in collateral values, complicating and delaying the economic recovery as we have seen in recent years in other jurisdictions."

In the past decade, the share of housing loans at Australian banks has increased from about 55 to 65 per cent, according to My Byres.

[Related: APRA warns lenders over high LVRs]