Increased scrutiny by lenders on borrowers' capacity has slowed loan approvals, and intensified weakness in property prices, where median prices fell 9.5 per cent in Sydney in 2018, and 8.2 per cent in Melbourne.

'We want to lend'

But Mr Hartzer said the falls needed to be seen in the context of a 75 per cent jump in Sydney prices between 2011 and 2017, and a 55 per cent rise in Melbourne prices over the same period.

"As to the perception that the royal commission has made banks scared to lend, for Westpac this is simply not the case," Mr Hartzer writes in the opinion section of The Australian Financial Review.

"Let's be clear: we want to lend. And we have enough capital and funding to ensure we continue to meet the borrowing needs of consumers, small businesses, and commercial enterprises – even in a downturn.

"For Westpac, the recent decline in credit growth was due entirely to a reduction in new applications: average approved loan sizes actually increased slightly, while our approval rates remained unchanged.

"In essence, our risk appetite hasn't changed – there are just fewer people walking through the door."

Harder for SMEs to meet new rules


But Mr Hartzer said the increase in scrutiny of customers' expenses and income, plus the building of additional buffers into loan serviceability calculations, had added to the time and cost of a getting a loan.

He said automation would reduce this burden for borrowers over time, but there was a concern that the increased administrative burden could hit credit for small and medium businesses, which typically used property to secure their business loans.

"One unintended consequence of these changes has been to penalise small businesses, where more complex cash flow and expenses have made it harder to meet the increased data requirements, given many loans are secured by residential property.

"We have raised this issue with regulators and government and are working to find a solution."

'Not the bursting of a bubble'

Banks raised rates to price out aspiring home owners, a move that also delivered the banks with another $1.1 billion in profit and has attracted the attention of the ACCC and the Productivity Commission.

Mr Hartzer praised the Australian Prudential Regulation Authority for intervening in the housing market in 2015 and 2017 with caps on investor loan growth and interest-only loans.

On Tuesday, APRA rejected claims that the caps delivered a profit windfall to the big banks and failed to consider the impact on smaller lenders.


Mr Hartzer joined the regulator in defending the strategy, saying he believed that history would show the actions were "well thought through, well implemented, and highly effective".

He described the banks' interest rate increases as 'reducing the attractiveness of investment property relative to other investments', which also allowed first home buyers

to increase their relative purchasing power

"My view is that the housing market remains fundamentally sound and, overall, the adjustments are nothing to be alarmed about."

Mr Hartzer said "uncertainty around potential taxation changes relating to residential property" was weighing on demand from property investors as while buyers were putting off decisions to buy, upgrade or invest until after the election. Some of the weakness in east coast cities reflected an oversupply in the apartment market.

"But it's important to note that it is normal – and indeed healthy for the economy – for the house price cycle to slow after the six strong years of growth to 2017," Mr Hartzer said.

"What we're seeing is an orderly adjustment – not the bursting of a bubble – that to date regulators and banks are managing reasonably well."

Shadow banks the winners


He also warned that some of the excess demand could head to lenders with looser lending standards, which posed further risks.

"Greater scrutiny of APRA-regulated lenders, particularly the majors, has resulted in smaller banks and non-banks growing faster, a trend that could warrant attention if an increased proportion of loans were being written at less stringent lending standards."

Westpac and its rivals are bracing for the release of Commissioner Hayne's final report and recommendations for the sector to be handed to the government on Friday and released to the public on late Monday afternoon.

The federal government has already indicated that it will do its utmost to spare smaller lenders and mortgage brokers from being disproportionately hindered by the recommendations.

The banks and mortgage brokers were found wanting in their provision of consumer credit during the royal commission, and widespread and regular failures to adhere to responsible lending practices were revealed.

Banks were also acutely aware of how upfront and trailing commissions paid to mortgage brokers were leading to poor outcomes but did nothing to resolve the problem.

While Westpac emerged from the hearings in relatively better shape than its rivals, it was exposed for deep-seated issues in its financial advice arm, including rogue financial planners and a ballooning fees-for-no-service compensation bill.

The bank's reputation, however, has taken a number of hits outside the royal commission hearings from protracted courtroom hearings over allegations of rate-rigging and irresponsible lending.