Why ASX bank shares are rocketing up Friday

Big banks rejoice as they no longer have to report to ASIC about their loan approvals and rejections.

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Responsible lending rules brought in after the global financial crisis are about to be scrapped.

Federal treasurer Josh Frydenberg will reportedly strip Australian Securities and Investments Commission's (ASIC) oversight into bank lending, to allow more cash to flow to alleviate the COVID-19 recession.

The effect of Frydenberg's reforms will be that lenders will no longer be punished if loan applicants mislead them about their circumstances. Banks can take the borrower's income and expenses information on face value, rather than be nervous about them lying.

Now banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking GrpLtd (ASX: ANZ) are ready for the good times to roll again.

All four major have seen their share prices shoot up Friday morning, with Westpac up 6.78%, NAB up 6.22%, ANZ up 5.28% and CBA up 3.57% shortly before 12noon. 

Why responsible lending rules?

The Labor government brought in the responsible lending rules in 2009 as a response to the global financial crisis. The GFC itself was triggered by US subprime loan defaults.

Ever since then there's been a tug-of-war on the topic between ASIC, the big banks, the Reserve Bank and the finance industry Royal Commission.

ASIC and the Royal Commission argued that lenders must apply the rules as they stand. The banks and the Reserve Bank complained it was too hard to give out credit that would otherwise boost the economy.

Irresponsible lending will send many Australians broke

Consumer groups on Friday roundly panned Frydenberg's reform plan, arguing Australians could fall into debt traps.

"The problem people are having right now is too much debt and not enough income. The government's solution is to take on more debt with fewer protections," said Financial Rights Legal Centre chief Karen Cox, who appeared as the first witness at the Royal Commission. 

"Unsustainable debt hurts real people and is a short-sighted fix for a flailing economy."

Choice chief executive Alan Kirkland said putting more people in debt has never resolved an economic downturn.

"We got rid of the idea of 'buyer beware' in consumer law decades ago. To make it the principle that guides lending in the middle of a recession has disaster written all over it," he said.

"Products like credit cards are complex. That's why banks make so much money out of them. Banks are in a much better position to assess a person's ability to repay, so they need to shoulder some of the responsibility."

Financial Counselling Australia boss Fiona Guthrie said we had already learnt from the GFC that weaker lending criteria would lead to trouble.

"There is significant profit to be made in pushing borrowers to the edge… Removing responsible lending obligations will free banks up to aggressively push credit onto their customers."

Banks have not recently indicated any hardship in handing out credit, according to Consumer Action chief Gerard Brody.

"The Commonwealth Bank recently said that the flow of credit is above pre-COVID levels and that lending is growing at a strong pace. And none of the big banks opposed the responsible lending laws at the recent House of Economics committee hearings."

Cox said it was incredible that the lessons from the Royal Commission have been "so quickly forgotten".

"Watering down credit protections will leave individuals and families at severe risk of being pushed into credit arrangements that will hurt in the long term."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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