Lift your games. For all the high talk about competition by the Prime Minister and the Treasurer, the reality is that our banks have been found wanting by regulators, and saved from making some highly embarrassing and costly mistakes. Regulators had trusted the banks to do the right thing and self-manage their lending, started hearing of problems, warned them to lift their games (several times) with little response, and APRA finally sent investigators into the banks earlier this year to examine their accounts and found multiple examples of imprudent lending, poor management and weak oversight by boards. And that means knowing their customers, not competing on housing and commercial property (and watching their growing exposures in New Zealand to the Auckland property bubble and the financially challenged Kiwi dairy industry, with a A$30 billion exposure). The RBA and APRA have continually pointed out that increased competition in the past year or so has resulted in a weakening in lending standards and finances for the banks. — Glenn Dyer

A little good news for the banks. But the RBA did have some “good” news for the naughty banks. The RBA’s Financial Stability Report (FSR) said the recent $22 billion in fresh capital raising has made the banks safer, but more would be needed next year to handle the added capital costs of home lending (this was a key part of the Murray Inquiry’s recommendations). But it could be needed because the RBA sees interest-only loan as a growing concern. But surprisingly the level of high-risk home lending with loans carrying a loan-to-valuation ratio of 80% and more was lower than expected. That was contrary to accepted wisdom among bankers, regulators and the media:

“Recent data revisions have revealed that loans with LVRs above 80 per cent and interest-only loans to owner-occupiers were somewhat less common than previously reported. These revised data show that the share of lending with LVRs above 90 per cent edged down over the first half of 2015, while the share of interest-only lending to owner-occupiers drifted up further. The increased prevalence of interest-only lending has been a concern for regulators; these loans can involve greater risk than principal and interest loans because borrowers need not pay down any principal during the interest-only period.”

— Glenn Dyer

Prudent Australians. But the RBA points out that Australian mortgage holders continue to repay their home loans faster than they have to (a point all but ignored in last week’s handwringing about the Westpac home loan rate and the damage that might do to consumer demand). Here’s what the RBA said in the FSR on Friday:

“Many existing borrowers also continue to take advantage of lower interest rates to effectively pay down their mortgages faster than required. This includes building up balances in offset accounts, which continue to grow rapidly. Aggregate mortgage buffers — as measured by balances in offset and redraw facilities — remain around 16 per cent of outstanding loan balances, equivalent to more than two years of scheduled repayments at current interest rates.”

According to the Bureau of Statistics, home loan balances totalled $1.378 trillion at the end of August, and the buffer mortgage holders have is more than $200 billion. That is a considerable lifeline for the banks and their mortgage holders. In fact, you could make the case that for the past two years or more, many mortgagees have been more prudent than the banks holding the loan in that they have built considerable buffers to protect themselves in the event of a housing shakeout. You can’t legislate for that sort of prudent behaviour — it’s a pity the banks have not followed suit in many cases. — Glenn Dyer