Recent UBS commentary suggests one plausible scenario where the knock-on effects of the Royal Commission could lead to a "credit crunch" scenario.
In an update co-authored by analysts Jonathan Mott and Rachel Bentvelzen as well as economists George Tharenou and Carlos Cacho, UBS said that as banks increase the stringency of credit applications - along with the launch of Comprehensive Credit Reporting (CCR) - two potential scenarios could emerge.
The first, the report explained, is that assessed household income is reduced and the household expenditure measure (HEM) increases over time.
As a result of this, "the banks move towards responsible lending over time and the flow of credit is constrained. The housing market slowly deflates."
The second scenario is where income assessment is tightened and the HEM increases significantly. In this case, the net income surplus "falls sharply," applications are mostly eliminated and banks comply with responsible lending laws.
The problem here, UBS argued, is that it results in "a sharp reduction in credit availability" - a credit crunch, in other words.
"While the UBS base-case economic outlook assumes only a modest tightening of credit conditions, we are now more concerned about a risk scenario which leads to a credit crunch and weaker-than-expected economic outlook. We remain cautious the banks despite underperformance," the report said.
UBS suggested even though the Royal Commission's interim findings won't be released until December (with the final report available in February next year), banks will already be addressing irresponsible lending.
The report cited ANZ recently ceasing consumer loans for cars, boats and caravans and CBA suspending credit card and personal loan insurance.
"Following intense questioning by the Royal Commission, we believe the banks' boards and management will move further to tighten underwriting standards to ensure they fully comply with the National Credit Act regarding responsible lending," the report said.