Australian banks are too lax in their lending standards, a new study has claimed. A new Bank of America-Merrill Lynch report has suggested that Australian banks are too liberal in assessing borrowers' monthly cost of living expenses, and are willing to lend too large an amount to households. According to a Fairfax report, the Bank of America-Merrill Lynch assessment found that Australian banks estimate the amount borrowers need for cost of living expenses at up to 7% below internationally recognised poverty indicators, and will therefore lend to borrowers below the poverty line. The Henderson Poverty Index projects the minimum necessary monthly expenditure of an Australian couple at $1,814 a month, while Australian banks project the amount at $1,708. Bank of America-Merrill Lynch, however, puts the number at $2,018 for a "barebones" budget and $2,504 for a "normal" budget. Merrill Lynch analyst Matthew Davison said banks are being too aggressive in growing their market share, while overestimating borrowers' ability to service a loan. "We think banks lend too aggressively against living costs," he commented. Davison said rising costs for household necessities such as food, transport and healthcare have not been taken into account by banks in the loan approval process. "We believe the strain on the household budget is too big to ignore, and banks don't accurately measure household costs," Davison commented. Davison predicted that these pressures, once taken into account, could lead to a more stringent credit analysis. "These pressures could possibly prompt the banks to update household budget models, thus tightening mortgage lending standards," he said. Davison has also suggested that banks do not properly investigate borrowers' credit cards or saving history. Related stories: Stress pushes arrears higher
