Commonwealth Bank Rolls Out Stricter Borrowing Regulations

The Australian reported that the Commonwealth Bank rolled out more stringent regulations on its borrowing requirements. The tightened rules would affect the bank’s over $400 million home loan book. Due to these changes, the bank will no longer recognize negative gearing benefits for Bankwest issued mortgages. CBA snapped upBankwest during the global financial crisis in 2008. The latter said that its “serviceability calculators”were upgraded and this would get rid of gearing tax benefits. It added that the changes are already in effect.Bankwest also emphasized the need to stick to the “regulatory guidance” as the banking regulator continues to check on banks to make sure that they are following the 10% growth restriction on property investor loans.

A Bankwest representative said the related tax benefit won’t be included in Bankswest’s calculation of the loan’s serviceability for clients whose investment properties are operating at a loss. This will also be applicable to clients wherein the incomes of their investment properties are lower than the costs. The spokesperson also said that this is applicable to all new applications that includes an investment lending facility and any current agreements that require a new serviceability calculation following February 10.

The CBA’s move to tighten its lending standards triggered the decision, which will also affect current borrowers. The primary reason for all this is the banking regulator’s requirement for banks to remain below the 10% annual growth cap or risk having to face higher capital requirements. Apart from that, CBA also revealed that it would cut off lending to some new property investors because of “regulatory commitments.” According to the information issued by APRA for the month of December, CBA’s investor lending rate exceeded the cap at 10.3%. Wayne Byres, the Chairman of the Australian Prudential Regulation Authority, called the attention of banks and said they would face higher capital requirements if they surpass the cap. This statement followed the Reserve Bank’s warning that there would be higher risks of settlement failures as a consequence of the increase in inner-city apartment developments over the past years, especially in cities like Melbourne and Brisbane.

Other banks have boosted their investor lending over the past few months as demand grew. According to the RBA, this pickup could be due to buyers who are sealing their purchases of off-the-plan apartments. Byres warned once more that the benchmarks that they have set including the 10% restriction for annual investor lending growth rate still stands. Lenders that prefer to operate and surpass this cap are “under no illusions” would be a possible consequence and that may mean higher capital requirements. Byres added that it may be good for the system in its entirety if this trend is encouraging banks to bring their competitive instincts to another place.

Bankwest is owned by Commonwealth Bank and that makes it the most exposed lender in Western Australia. This is one thing that concerned many analysts especially with the notable slowdown in the activities within the mining sector. Meanwhile, CLSA analyst Brian Johnson noted that the end of the construction phase has led to higher unemployment rate and lower house prices.