Hold Line On Credit Standards, Banks Told

Sydney Morning Herald

Friday September 29, 2006

Jessica Irvine

THE Reserve Bank has issued a strong warning that the banks should not relax their lending standards in the face of increasing competitive pressure and declining margins.

While Australia's banks remain highly profitable, 15 years of economic growth and competition from foreign banks had raised the temptation to relax traditionally tight credit standards, the Reserve said yesterday in its six-monthly financial stability review.

"Competition in the housing loan market ... remains very intense, with ongoing margin compression," the Reserve said.

"The challenge for banks and other lenders is to avoid an undue erosion of credit standards."

Competition has already manifested in substantial discounts for consumers on the Reserve's standard variable interest rate and the extension of loans to increasingly "sub-prime" and low-doc borrowers.

And while Australian household balance sheets remain "in reasonable shape", according to the bank, signs of financial stress are already emerging.

Despite generational low unemployment, arrears rates on housing loans have edged up since the housing boom ended.

The proportion of outstanding housing loans on which payments are 90 days overdue has doubled over the past two years to 0.3 per cent.

"Developments in household balance sheets, both at the aggregate and the disaggregated level, continue to warrant close attention," the Reserve said, noting that arrears rates remained low by historical standards.

"It is important that both borrowers and lenders recognise that the experience of recent years may not be the best guide as to how the future unfolds."

However, fears of a disorderly unravelling of global equity and mortgage markets in the wake of rising global interest rate rises had failed to materialise.

"From a financial stability perspective, the past six months have been broadly reassuring," the Reserve said.

TD Securities' chief strategist, Stephen Koukoulas, said the Reserve appeared fairly relaxed about the impact of this year's interest rate rise on households.

"There were a few hints that a further interest rate rise is still very much on the cards," he said. For example, the Reserve predicts "global growth in 2007 is expected to remain strong".

According to Mr Koukoulas: "These do not sound like the comments of a central bank that would hold back on an interest rate hike if it felt inflation pressures were unacceptably high."

CBA lags; job vacancies slip - Page 22

© 2006 Sydney Morning Herald

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