"That's what you should be thinking about if you're looking at your ability to repay the loan," he said. But adding to similar concerns raised by the prudential regulator in recent months, Mr Medcraft said the report had made "mixed" findings on whether banks were using a high enough "stress rate." He added that some of the underwriting standards had been improved in recent months. "Many of them have since corrected their ways or are correcting them." Mr Medcraft also highlighted some borrowers failing to rigorously assess a borrowers' cost of living, including national indexes that did not reflect local variations. "Some are using a cost of living index that is completely inappropriate for where that person is living. So if they're living somewhere like Paddington in Sydney, probably using the poverty line as the cost of living for that person is probably inappropriate."

Excessive risk-taking concerns The findings come after banks have been forced to tighten their lending to housing investors in response to official concerns of excessive risk-taking in the $1.3 trillion mortgage market. ANZ Bank, Commonwealth Bank and National Australia Bank and AMP Bank have all lifted interest rates for housing investors since last Thursday, a move they have justified by pointing to a 10 per cent a year cap in investor credit growth. Speaking at a lunch in Melbourne, NAB chief executive Andrew Thorburn said he was alert to the risks in market but NAB also needed to serve customers who were in a strong financial position. "We feel pretty comfortable with the risk we are taking on. We don't disagree that we need to be prudent at this point in the cycle but we also need to acknowledge there are real customers out there that have can actually deliver against not just the interest rate we are giving them, but against 7 per cent, which is the minium rate that we put into the system," Mr Thorburn said.

Mr Medcraft also joined other regulators in urging customers to be wary of the risks created by very low interest rates, stressing that people needed to think about managing their loan repayments a more "normal" environment." "The whole issue at the moment in the markets is you've got to get people appreciating we are in a unusual situation, there's an extraordinary amount of liquidity," Mr Medcraft said. Reserve Bank governor Glenn Stevens told the same conference it was hard to know in advance whether stricter rules on banks would prevent another crisis however regulators had little choice but to boost capital buffers. The Australian Prudential Regulation Authority has also highlighted flawed lending standards from lenders in recent months – though it does not regulate lenders that do not take deposits from customers. Mr Medcraft, who previously worked in securitisation markets, said failure to have proper underwriting standards could lead to serious problems.

"Frankly as I saw in the United States and elsewhere, this is where often the issue is, when underwriting is compromised," he said. Various banks have bolstered their credit checks of customers in recent months, while ASIC also named Bank of Queensland as one bank that had moved to apply more rigorous assessment of borrowers' living expenses. Banks have responded to the risks in housing – and APRA's 10 per cent speed limit – by cutting discounts for investors, forcing borrowers to stump up bigger deposits, and assessing incomes more stringently. This week AMP Bank also took the more drastic step of freezing new lending to housing investors so that it does not breach the cap. It can't be known whether the higher levels of capital being imposed on banks will be sufficient to protect the financial system from another crisis, says Reserve Bank governor Glenn Stevens.

But he said the measures, which are being introduced in Australia and around the world to reduce bank leverage and create bigger equity buffers to absorb losses, were not likely to do the economy any harm.