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Beware the pitfalls of easing loan rules

The federal government’s revelation on Friday that it has racked up a record deficit of $85.3 billion for 2019-20 put on full display the extent it’s willing to spend to assist households and businesses get through the coronavirus pandemic. With the states also being urged to spend up big, this is Keynesian economics on steroids.

Treasurer Josh Frydenberg has now called on banks to play their part, and has set in train an overhaul of the laws governing mortgages, personal loans and credit cards to encourage them to inject more cash into the economy.

Treasurer Josh Frydenberg wants to overhaul bank lending rules to make it simpler to decide mortgages and credit card lending.

Treasurer Josh Frydenberg wants to overhaul bank lending rules to make it simpler to decide mortgages and credit card lending.Credit:Alex Ellinghausen

In the biggest shake-up of the consumer credit protection laws since they were passed in 2009 by the Rudd government after the global financial crisis, the proposed changes would strip away the Australian Securities and Investments Commission from oversight of lending for the banks. This would leave only the prudential regulator (APRA) to ensure whether a bank’s lending practices puts its stability at risk.

For a customer walking into a bank hoping for a loan or extra credit, it would mean far less scrutiny of their finances before gaining access to more funding. With less due diligence from the bank, the onus for ensuring the loan or credit is appropriate would very much land in the customer’s lap. As a principle, responsible lending would be replaced with the concept of responsible borrowing.

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