Australia's banking watchdog says crackdown on risky lending largely complete

By Paulina Duran

SYDNEY (Reuters) - Australia's banking watchdog on Wednesday said its intense crackdown on risky mortgage lending was largely complete, as higher lending rates were also helping cool the country's housing market.

"Any tightening from here on is expected to be at the margin as banks seek to get a better handle on borrower expenses, and better visibility of borrower debt commitments," said Wayne Byres, Chairman of the Australian Prudential Regulation Authority (APRA).

His comments come as the country's scandal-hit banks are expected to hike mortgage rates even as the official rate remains steady, piling pressure on home prices which have already fallen for nine straight months.

Addressing economists in Sydney on the mortgage market and the good health of banks balance sheets, Byres also said 13 of the country's largest banks had passed "severe but plausible" stress tests applied by the regulator.

The large banks, which control about 80 percent of the A$1.7 trillion ($1.26 trillion) housing loan market, were expected to continue focusing on developing strong lending policies, including their own internal limits to new risky lending.

A powerful inquiry into misconduct in the sector that uncovered cases of fraud and loose lending standards by the country's largest lenders - Commonwealth Bank of Australia , Westpac , Australia and New Zealand Banking Group and National Australia Bank - has triggered a move to tighten their controls.

"Lending to investors is certainly now growing more slowly compared to three or four years ago. But despite the tightening in lending standards ... lending to owner-occupiers grew at a very healthy 8 per cent over the past year," Byres said.

In May, the regulator scrapped a strict cap on lending to property investors introduced four years ago to rein in speculative investments, as high-risk lending had moderated as desired.

Investor loan growth had fallen to close to 2 percent, only a fifth the rate in 2015, according to APRA's records.

Byres said the regulator would "remain alert to slippage," a reference to smaller lenders and non-bank lenders, which according to analysts have grown mortgages at about 12 percent annually.

After the positive stress test results, APRA will put pressure on banks to fine tune their systems to respond to and recover from severe shocks effectively, Byres said.

"Despite significant losses, these (test) results nevertheless provide a degree of reassurance: banks remained above regulatory minimum levels in very severe stress scenarios," Byres said.

Regular testing of rescue plans would help build confidence that the governance and escalation procedures were well understood, he added.

(Reporting by Paulina Duran; Editing by Sam Holmes)

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