Commercial property advice standards eroded
An Australian Prudential Regulation Authority (APRA) review has found clear evidence of an erosion of standards in the advice provided by major lenders on commercial property.
Speaking at the Committee for Economic Development of Australia’s (CEDA’s) property market outlook on Friday, APRA chair, Wayne Byres said major lenders were well aware of the need to monitor commercial property lending closely, and the need to stay attuned to current and prospective market conditions.
He said that the erosion of standards was due to competitive pressures.
“For example, lenders justifying a particular underwriting decision not on their own risk appetite and policies, but based on what they understood to be the criteria being applied by a competitor,” Byres said.
“We were also keen to see genuine scrutiny and challenge that aspirations of growth in commercial property lending were achievable, given the position in the credit cycle, without compromising the quality of lending.
“This was often being hampered by inadequate data, poor monitoring and incomplete portfolio controls. Lenders have been tasked to improve their capabilities in this regard.”
Byres said the more heterogeneous nature of commercial property lending made it difficult to implement the sorts of benchmarks that were applied to residential lending.
He noted that while commercial lending exposures of APRA-regulated lenders continued to grow in absolute terms, they had declined relative to the banking system’s capital, and that exposures were now well down from pre-GFC levels as a proportion of capital.
“Sound lending standards are vital for the stability and safety of the Australian banking system, and given the high proportion of both residential mortgage and commercial property lending in loan portfolios, there will be no letup in the intensity of APRA’s scrutiny in the foreseeable future,” Byres said.
“Prudence (not prices) is our catch cry: our objective is to make, ensure that, whatever the next stage of the property cycle may bring, the balance sheet of the banking system is resilient to it.”
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