Australian Banks Surge as Lending Laws Eased to Boost Economy

Australia will make it easier for banks to approve mortgages and small-business loans to help the economy recover from its first recession in almost 30 years. Shares of the nations biggest lenders surged.

As part of a sweeping overhaul of so-called responsible lending obligations, the government will allow banks to rely on income and spending information provided by borrowers when assessing loan applications, rather than doing their own lengthy verifications, Treasurer Josh Frydenberg said Friday.

The changes effectively end a decade of ever-increasing regulation for the banks that peaked last year when a wide-ranging inquiry into misconduct recommended a stricter observance of lending rules. Caught in the regulatory cross-hairs, the nations biggest lenders became cautious -- stifling credit to the economy even with borrowing costs at record lows.

In the biggest change, the onus of responsibility for determining the suitability of a loan will be shifted to the borrower instead of the bank, to address the “excessive risk aversion which has built up and restricted the flow of credit,” the government said. That should reduce the need for extensive verification procedures that can often account for half the loan application process.

Bank shares surged, pushing the benchmark S&P/ASX200 Index higher, on optimism the changes will reduce compliance and regulatory costs. Australia & New Zealand Baking Group Ltd. gained as much as 5.7% and Commonwealth Bank of Australia rose 4%. National Australia Bank Ltd. climbed as much as 6.9% and Westpac Banking Corp. surged 7.3%.

The Australian Banking Association welcomed the announcement. “With the right balance, these changes will simplify lending rules while maintaining strong protections for borrowers and improving protections for those vulnerable consumers using debt management firms, small amount credit providers and consumer leases,” Chief Executive Officer Anna Bligh said in a statement.

The move is part of a broader regulation-busting package aimed at helping the economy rebound from the coronavirus-induced recession. Frydenberg on Thursday announced what he called the most significant insolvency law reforms in almost three decades, and outlined plans to keep the budget in deficit until unemployment falls below 6%.

Read more: Frydenberg Sets 6% Australian Jobless Threshold in Recovery Plan

“As the nation strives to recover from Covid-19, the provision of and access to credit will be critical to rebuilding every sector of our economy, from hospitality to tourism, construction to retail,” he said Friday.

By relaxing responsible-lending obligations, the government has effectively heeded what became known as the ‘wagyu and shiraz’ verdict, when the Australian Securities and Investments Commission lost a high-profile case claiming Westpac breached the laws by relying on spending benchmarks in approving mortgages. The regulator argued actual living expenses should be used instead of benchmarks, which have been criticized for underestimating how much people spend.

As part of his ruling, Justice Nye Perram said borrowers can change their spending habits to service a mortgage: “I may eat wagyu beef everyday washed down with the finest Shiraz but, if I really want my new home, I can make do on much more modest fare.”