Real Estate

Australia moves to dial down financial stability risks in home loans

Key Points
  • The Australian government released a draft legislation to make the Australian Prudential Regulatory Authority more powerful
  • The government is also seeking to boost competition in the banking sector
  • The ARPA is likely to announce new capital rules for banks this week

The Australian government is seeking to broaden the powers of the country's prudential regulator to include non-bank lenders as concerns about financial stability take center stage amid bubble risks in the nation's sizzling property market.

A draft legislation released by the government on Monday, if passed, will help the Australian Prudential Regulatory Authority (APRA) dial down some of the risky lending in the A$1.7 trillion ($1.33 trillion) mortgage market, the size of the country's economic output.

Home prices in Sydney have fallen about 7% since the start of 2022 and as interest rates rose.
Brendon Thorne | Bloomberg | Getty Images

Australia's four biggest banks have already cut back on home loans in recent months and pulled away from institutional lending to real estate developers, as regulators force them to keep aside more capital and slow lending to speculative property investors.

Non-bank lenders have been quick to pick up the slack, with their loan-books expanding at a much faster clip than the banking sector's 6.5 percent overall credit growth. This development is stoking concerns for authorities as a combination of record-high property prices and stratospheric household debt sit uncomfortably with slow wages growth.

"APRA does not have powers over the lending activities of non-bank lenders, even where they materially contribute to financial stability risks," Treasurer Scott Morrison and financial services minister Kelly O'Dwyer said in a joint statement.

"Today, the government is releasing draft legislation for public consultation that will provide APRA with new powers.

These new powers will allow APRA to manage the financial stability risks posed by the activities of non-bank lenders, complementing APRA's current powers."

The consultation of the draft bill will close on August 14.

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To be sure, the size of Australia's shadow banking sector is puny, at around 6 percent of financial system assets, and is relatively smaller than in a number of large economies.

Non-banks account for about 1 percent of Australian mortgage lending which is dominated by the so called "Big Four" - Commonwealth Bank, Westpac, National Australia Bank and ANZ Banking Group.

The quartet together control more than 80 percent of the country's lending and deposits.

In a separate statement on Monday, Morrison and O'Dwyer said the government was also seeking to lift the prohibition on the use of the word 'bank', in a bid to make the sector more competitive.

"New entrants to the Australian banking market face a simple but significant obstacle - the prohibition on the use of the word 'bank'," they said. "This acts to discourage innovative new
players from entering the market."

Separately, local media is speculating the APRA will announce new capital rules for major banks this week as it moves to make them "unquestionably strong" in the event of another global financial crisis.