APRA cautions banks on poor commercial lending standards
The banking regulator has nudged banks to improve their standards in commercial lending, saying sound underwriting standards are important for the safety of the banking system and the financial system as whole.
The letter from the Australian Prudential Regulation Authority comes in the wake of its review of the commercial property sector in 2016 after a surge in prices owing to more offshore demand from sovereign wealth funds and pension funds.
The letter starts with the statement that commercial property lending “has historically been a source of significant loss for banks, both in Australia and overseas,” and goes on to say that lenders have not properly managed their risk profile of for commercial lending due to inadequate data, poor monitoring and incomplete portfolio controls.
The APRA said it expects authorised deposit-taking institutions (ADIs) to improve their capabilities in this area, and has written to individual lenders about their specific requirements.
The note states that under “current market conditions, it is important that the Boards of ADIs are conscious of the settings for underwriting standards and portfolio controls, and in a position to challenge as appropriate”.
Sound credit underwriting standards are fundamental to the safety and soundness of lenders, as well as the stability of the financial system as a whole, it adds. “This is particularly the case in the area of commercial property lending, which has historically been the source of significant credit losses for the Australian banking industry. “
It said the review found that many ADIs fell short of expectations regarding portfolio controls for commercial property, driven in part by "an underinvestment in information systems, leading to challenges in extracting portfolio data".
The letter states it is “critical that ADIs maintain appropriate standards through the credit cycle, and are prepared to tighten those standards as circumstances dictate”.
It noted that though there was a general tightening of underwriting standards, especially for residential development lending, it hadn’t been uniform and lenders would do well to ensure that they are not unduly accepting greater risk as other lenders step back.
Banks have been particularly careful about lending to investors in the residential sector, with Commonwealth Bank and its subsidiary, BankWest, recently taking steps to curb refinancing of investor loans.
On commercial lending, the regulator said it expects ADIs to manage “not only the risk of individual loans but also consider build-ups in risk at the portfolio level”.
