Australian banking commentators have highlighted the conflicting obligations banks face at the present time. On one hand they are being required to hold more capital, but on the other they are being encouraged to loosen underwriting standards.
Capital position
The Royal Commission review has tightened ‘treating customers fairly’ procedures and ramped up individual accountability under the Banking Executive Accountability Regime. At the same time APRA has required banks to allocate increased capital following self-assessment audits which identified various corporate, cultural, governance and non-financial risks. All this points to a period of slower growth while banks focus on getting their houses in order. But things are not that binary in the banking world, as bankers must meet what sometimes appear to be competing requirements. Despite the recent culture change focus, banks are being encouraged to loosen lending standards at the same time.
Lending standards
Most commentators agree that the Australian economy, especially the housing market, needs a boost and concerns are already being voiced about long-term risks. Although house price falls seem to be easing in key markets, it is hoped that the loosening of lending standards, such as the regulators U-turn on affordability tests, and the resulting increase in loan availability will help the market to recover. While the economic and social responsibility to lend principles may have some short-term attractions, any increase in household’s borrowing capacities and lowering of standards increases long-term risks. Lending markets around the globe have been subject to previous boom and bust cycles when underwriting criteria have been loosened to such an extent that the increased layering of risk has caused loan default issues.
Early and effective risk identification is critical to successfully manage the current cocktail of risks. That identification needs to be effective throughout the product sales cycle and during the life of the customer relationship. The Rockstead Group has years of experience in helping clients identify and manage risk; initially through our company Rockstead Ltd and latterly through Yabber Global, particularly in Australia. Part of our risk assessment process looks at interactions between firms and customers. [Click here] to download our guide to managing conduct risk in a post Royal Commission regulatory world.