Submission to the Inquiry into the Post-Global Financial Crisis Banking Sector Trends in Bank Lending

Over the 25 years prior to the onset of the global financial crisis, credit grew at about three times the pace of nominal GDP, increasing from around 50 per cent of GDP in the mid 1980s to around 160 per cent by the beginning of the crisis in mid 2007 (Graph 1). This mainly reflected the increased capacity of borrowers, especially households, to service debt as nominal interest rates fell in line with the decline in inflation since the early 1990s. Financial deregulation, increased competition, new products, and some easing in lending standards were also factors.^[1]

Since the onset of the global financial crisis credit growth has slowed. Over the past year credit has grown by just over 3½ per cent, which is around 2½ percentage points lower than growth in nominal GDP (Graph 2). While this is considerably slower than before the global financial crisis, the current pace of household lending growth is similar to income growth. Notwithstanding the recent pick-up in business lending, households' and businesses' attitude towards debt are unlikely to change in the foreseeable future.

In housing lending markets, the major banks have been competing for most of the past year for market share in an environment of slower credit growth. Most of this competition has been in the form of larger discounts. Non-price conditions for housing lending have been eased only very slightly over recent years. Our assessment is that lending standards remain marginally tighter than before the crisis.^[2] The share of low-doc lending has fallen since the middle of the previous decade, and is now just over 1 per cent of banks' loan approvals. The decline was partly in response to the introduction of national responsible lending guidelines that require lenders to verify a borrower's capacity to repay. Non-conforming lending remains a negligible share of outstanding lending and, at present, the flow of new lending is insignificant.

Since early 2012, competition among the major banks in terms of pricing has eased somewhat, partly reflecting the higher funding costs relative to the cash rate (discussed below). This has contributed to the major banks' market share of approvals for new housing loans declining slightly since early 2012 (although their share of the existing stock of housing credit has risen) (Graph 3 and Graph 4).^[3]

Conditions in securitisation markets improved during 2011, with issuance for the year the highest since 2007. However, these markets were affected by the heightened risk aversion related to events in Europe in the second half of 2011. Much of the issuance in 2011 was undertaken by the major banks, including some covered bond issuance.^[4] In contrast, so far this year there have been five RMBS transactions, only one of which was by a major bank.

The structure of the market for business credit has changed somewhat since the global financial crisis. Some foreign lenders (banks and non-banks) have exited, particularly European-owned entities, as their parent entities have sought to scale back their global operations. The overall level of business credit provided by foreign-owned entities has, however, been little changed over the past year, with a number of Asian banks expanding their local presence (Graph 5).^[5]

The most significant change in business lending since the onset of the global financial crisis has been in the provision of finance to the commercial property sector, including developers of residential property. Some of this reflects the fact that the foreign banks which have scaled back their operations in Australia had large exposures to this sector. Other banks have also reassessed the risks of lending to this sector, in light of commercial property exposures accounting for a disproportionate share of impaired bank loans.

Beyond developments in commercial property, the softness in business credit in the years following the global financial crisis has reflected both weak demand from the non-mining business sector as it has taken a more conservative approach towards debt in an uncertain environment, and the mining sector making little use of domestic intermediated credit. More recently, there are some tentative signs that larger business borrowers are willing to take on some additional debt (Graph 6).

Footnotes

See Reserve Bank of Australia (2010), ‘Submission to the Inquiry into Competition within the Australian Banking Sector’, Submission to the Senate Economics References Committee Inquiry into Competition within the Australian Banking Sector, 30 November. [1]

See Reserve Bank of Australia (2011), ‘The Australian Financial System’, Financial Stability Review, September, p 34. [2]

See Reserve Bank of Australia (2010), ‘Submission to the Inquiry into Competition within the Australian Banking Sector’, Submission to the Senate Economics References Committee Inquiry into Competition within the Australian Banking Sector, 30 November. [3]

See Reserve Bank of Australia (2012), ‘Box D: Covered Bond Issuance by Australian Banks’, Statement on Monetary Policy, February, pp 57–58. [4]

See Reserve Bank of Australia (2012), ‘Foreign-owned Bank Activity in Australia’, Financial Stability Review, March, pp 38–40. [5]