News last week was all about Australia’s corporate watchdog ASIC launching a new round of industry surveillance to ensure banks and brokers were not recommending overly expensive interest-only loans to customers. This follows APRA’s announcement of new macro-prudential restrictions on banks including changes in lending restrictions – the main one being the 30% cap on interest only lending going forward (currently around 40% of lending is interest only according to APRA).
The regulator fears the high proportion of interest only loans represents a higher system risk profile than they would like. This highlights the pressure APRA are under to cool the red-hot property market, especially in Sydney and Melbourne where home values are up an annual 18.9% and 15.9% respectively according to property consultant CoreLogic. If a bank within APRA’s influence breaches the 30% limit, APRA will consider “the need to impose additional requirements”.
The recent regulator focus on macro-prudential controls reminds me of banking in the 1980’s (yes, I’m that old). At the time, loan growth was limited to 10% but banks found ways around the rules. They converted business loans to bank bill facilities which were not counted in the loan numbers, but provided the same credit for the client. They required borrowers to repay overnight loans on a Wednesday because it was the reporting day, and then lent to them again the next day. Those were the bad old days and banks don't behave like that now(?).
RBA on hold, no rate move on the horizon
While the latest RBA Board meeting minutes last week provided no suggestion of any near-term change to interest rates it did highlight softening in some labour market indicators. In addition, in a speech last week, RBA Governor Lowe highlighted the weakness in the labour market saying conditions remain ‘pretty soft’ and wages growth is ‘the lowest in some decades’. I still see the RBA keeping the official interest rate on hold for an extended period, possibly till mid next year.