less to do with the risks taken on by banks themselves in lending to customers. Instead it was more about the risks that have been building in the broader economy, as the Trans-Tasman nation braces itself for interest rate hikes during the near future.
“We think bank lending standards on the whole have held up quite well. But the broader environment is nonetheless one which creates dangers of very high levels of leverage,” Wayne Byres, chairman of the APRA, said during the UBS Australasia conference on Monday (15 Nov).
“The problem was, potentially we had strong incentives to take on higher leverage at a time when the household sector is already highly liquid,” he added. “And the step we took can simply be thought about as […] buying a little bit more insurance, if you like, that borrowers will not be over-extending themselves, particularly if we are moving sooner than expected into a cycle where interest rates start to rise.”
Financial markets are currently anticipating rate hikes to be announced by central banks next year, despite the fact that the US Federal Reserve and the Reserve Bank of Australia have insisted that they will not increase rates until they see sustained inflation and strong employment.
While an increase in interest rates will help ease the APRA’s mind, it is not without consequence since such a decision would put a little more pressure on indebted households, although Byres has indicated that he thinks most borrowers have a suitable buffer. “If we went into an environment where interest rates started to increase, then maybe there’s actually no more work for us to do because there’ll be a natural increase in interest rates which will, by itself, start to slow down the very high levels of new loans-to-income that are flowing through the system,” he said.
