APRA cracks down on 'shadow bank' lending

Australian Financial ReviewMar 31 2017 5:47 PM

Jonathan Shapiro

Banks have been warned not to channel loans through smaller, unregulated "shadow banks" as a way of avoiding the crackdown on risky home lending.

It's a move aimed at weakening the forces that contributed to the 2008 financial crisis in which risky mortgages were originated outside the banking sector and packaged into bonds that were sold to banks. 

In its letter to the banks outlining a new wave of lending restrictions aimed at cooling a heated housing market, Australian Prudential Regulation Authority chair Wayne Byres has told the banks that it is monitoring the growth of "warehouse facilities" or short-term loans provided to other lenders.

He said it would be concerned if these warehouse loans were growing faster than the banks' own mortgage book or if the loans held in these warehouses were of a "materially lower quality" compared to the rest of the industry.

"APRA have been mindful to structure this such that it doesn't create regulatory leakages into the non-bank sector," said Westpac's head of macro strategy David Goodman.

Non-bank lenders such as Pepper Home Loans, Firstmac, Resimac and LaTrobe are not deposit-taking institutions, and therefore not regulated by APRA.

This means they are not subject to lending restrictions on interest only and investor loans and can, in theory, weaken APRA's efforts by writing riskier loans that the banks cannot.

However, these lenders rely heavily on short-term "warehouse" loans provided by the major banks to write home loans.

Once a large enough pool has been created the lenders create mortgage backed bonds that are sold to institutions, allowing them to repay the warehouse loans.

The banks in turn generate healthy lending margins by providing warehouse loans to the non-bank lenders and earn debt capital markets fees from managing the mortgage-backed bond sales.

However by imposing lending restrictions on the bank's warehouse loans to non-banks, APRA believes it can curb non-bank lending too.

But the provision of warehouse financing means APRA is able to influence the extent to which the non-bank, or shadow lending sector, can meet the demand for interest-only and investor loans.

Mr Goodman says there are examples where regulators have been able to exert control over the non-bank sector.

"The experience in New Zealand showed that lending didn't leak out into the shadow banking sector because of the monitoring of banks' warehouses."