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RBA warning on what could cause spiralling debt

·3-min read
The Reserve Bank has flagged the thing that could trigger rising debt levels in Australia. (Source: Getty)
The Reserve Bank has flagged the thing that could trigger rising debt levels in Australia. (Source: Getty)

Looser lending standards could lead to “overexuberance” in Australia’s property market and trigger debt to rise, the Reserve Bank of Australia has warned on Friday.

Property prices, which have grown at breakneck speed in recent months, haven’t yet led to any major increase in debt – but this could become a risk in the future, the RBA said in its half-yearly Financial Stability Review released this morning.

As such, banks will need to keep lending standards on a tight leash.

“In an environment of accommodative financial conditions with rising asset prices it is particularly important that there is not excessive risk-taking by the financial sector,” it stated.

Higher risk-taking behaviour from lenders can take many forms, the RBA said, such as looser lending standards for individual loans or relaxing internal limits on the volume of risky loans they take on.

“Even if lenders do not weaken their own settings, increased risk-taking by optimistic borrowers could see a deterioration in the average quality of new lending,” the review said.

“This would weaken the resilience of businesses and households, and so the financial system, to future shocks.

“Increased risk-taking would fuel rising debt, from already high levels, increasing the debt-related risks to the economy and financial system from a fall in asset prices and borrowers’ income.”

Lending laws in the spotlight

The Federal Government currently has plans to repeal responsible lending laws in a move Treasurer Josh Frydenberg argues is necessary to stimulate the economy and help Australians access credit and loans with less red tape.

“Maintaining the free flow of credit through the economy is critical to Australia’s economic recovery plan,” Frydenberg said late last year.

“By simplifying the loan application process for borrowers it will reduce barriers to switching between credit providers, encouraging consumers to seek out a better deal.”

But this proposal has attracted criticism from a swathe of consumer groups; a CHOICE petition against the law repeals said the safe lending laws were “essential consumer protections” and that this would see people worse-off and lead people into debt.

The petition has been backed by more than 125 organisations, including the Australian Council of Social Services, Financial Rights Legal Centre, Australian Council of Trade Unions, Anglicare, Slater + Gordon Lawyers and more than 34,000 Australians.

The move to scrap responsible lending has also been backed by the Senate Economics Legislation Committee, which stated that the regulatory changes wouldn't undermine consumer protections.

Debate on the National Consumer Credit Protection Act 2009 amendments has been deferred until 11 May.

Cyber security a chief risk to Australian financial system

Cyber attacks were pinpointed as another key risk to the stability of Australia’s financial system, with these attacks growing more sophisticated, the review said.

“With a very large and increasing number of attacks, there remains the likelihood that even large financial institutions or critical financial market infrastructure will at some point be impacted, including via third-party providers.

“Substantial cyber attacks could risk financial stability if, for example, they corrupt significant data or if they affect large parts of the financial system or critical nodes.”

Financial institutions will have to take preventative measures to safeguard against these attacks as well as develop response plans to future cyber security breaches, the RBA warned.

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