The Reserve Bank of Australia has sounded the alarm over the loosening of bank lending terms in light of increasing competition from Asian-owned banks operating in Australia, but economists say there is no need for concern just yet.
The RBA half-yearly Financial Stability Review released yesterday indicated bank business loan conditions have remained “broadly unchanged” in the past six months, as demand for intermediated debt has been subdued.
But the RBA says there are exceptions which suggest some banks are loosening their loan standards.
“The exception is the wholesale market where strong competition amid weak borrower demand has compressed loan margins and, in some instances, eased loan covenants.”
“Some of the Asian-owned banks seeking to expand their businesses in Australia are reportedly competing aggressively for syndicated loans, increasing their share of this market noticeably over the past year,” the review says.
Asian banks increased their share of local syndicated loans from 13% in 2007, to 23% as of December last year, according to the RBA.
While Asian-owned banks are trying to gain a greater share of the syndicated loans market, the European-owned banks are doing the opposite, suggesting regional economic conditions are likely to be affecting their practices.
The review continues to caution Australian banks, with some facing lower profit margins in the current conditions, not to loosen their lending practices.
“Slow credit growth can pressure banks to compete harder to maintain their overall revenue growth. From a risk management perspective, it is important that the banks do not respond by imprudently loosening their lending standards,” the review says.
Late last month, Australian Prudential Regulation Authority chairman John Laker also cautioned banks over lending behaviour.
But some economists say there is no need for alarm. AMP Capital Investors chief economist Shane Oliver told SmartCompany lending rates are still significantly lower than they were before the GFC.
“Naturally, it’s appropriate that we go through a period where the debt levels settle down a bit and overall lending rates have been quite subdued,” he says.
Oliver says the current situation is not “overly concerning”.
“Lower lending rates put pressures on banks in terms of their profitability. I think some banks may have loosened lending conditions a little bit as the housing market started to improve, but we’re a long way from where we were prior to the GFC,” he says.
Oliver says a year ago market conditions “led to a tightening of lending terms”, but now mortgage rates have fallen and the housing market is more secure, which has led to a slight loosening of the lending conditions.
“I wouldn’t characterise it as being worrying at the moment. But to try and encourage profitability, the banks will take on a little bit more risk, but this hasn’t been excessive. And the RBA have lowered interest rates, which is usually to spur a bit of risk taking in the economy.
“There is a fine balancing act of households and businesses taking on risk, but not so much that it leads to another boom. At the moment, we’re not at the point,” he says.
Oliver says in the next two years the situation should be monitored.
“Be alert, but not alarmed. Keep an eye on it, the last thing we want is a re-inflation of the whole price bubble,” he says.
