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Banks play with fire by reducing loan standards

by Staff Reporter10 minute read
The Adviser

Steven Cross

Australian banks are cutting lending standards for home loans in what has been labelled a ‘reckless’ move to secure more business.

As families avoid debt, leading analysts believe the banks are becoming more desperate for business and are in danger of again embracing the dangerous lending standards that led to the collapse of banks elsewhere in the financial crisis.

Experts at global investment bank Credit Suisse say there is growing evidence Australia's lenders are lowering their standards as "revenue pressures" mount.

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In a note to investors, Credit Suisse analysts said it appeared banks were holding on to mortgage credit risk rather than turning to specialist insurers to offload the risk.

"Our industry liaison suggests that this process is starting to occur," said the group's banking team, led by Jarrod Martin.

Mr Martin said lending standards had not yet slackened to the extent seen in the pre-crisis era, however it could be heading in that direction.

"Banks do not become better at credit risk management so much, but rather get better at fighting the last war. Institutional memory and lessons from previous credit cycles inevitably fade," he said.

The analysts said banks were more consumed with defending current margins than addressing growing risks in the financial system.

"Financial systems and products evolve in new ways ... And banks 'find' new ways to lose money."

In the note, Credit Suisse analysts said there were no indications of a looming mortgage arrears crisis.

It noted the Reserve Bank has warned that lenders, including the big four, last year started giving mortgages to borrowers with deposits of just five per cent.

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