The Australian Prudential Regulation Authority is slowly pressuring banks’ commercial real estate lending after it has been revealed that this area is the most exposed to a deterioration in economic conditions due to fears of a looming supply glut.

According to APRA’s executive general manager for supervisory support Charles Littrell, it was “not a bad time to be seeing banks strengthen the equity position in their balance sheet,” amid estimates of a national oversupply of 70,000 apartments. Hence, many experts predict that the Big Four banks may have to seek more cash from shareholders in the coming years to meet new regulations.

“They’re all in the same business model, they’re all hugely exposed to each other, and we don’t quite know what would happen if that business model gets whacked by external stress all at once,” Littrell said, referring to the four major banks. “So there is a lot of conventional work at our end focusing on sound lending and in fact now we’re dialing up our systemic supervisory focus on commercial real estate.”

Reserve Bank head of financial stability Luci Ellis said that a downturn in residential property loans would be relatively low risk compared to any other banking business model.

“The thing that has tended to be the causal agent in a banking crisis, even though you saw something go wrong in housing prices, it was the property developers, it was the commercial real estate, these are the vectors of distress,” she said.

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