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Are ASX bank shares a buy after lending rules eased?

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Are ASX bank shares like Commonwealth Bank of Australia (ASX: CBA) a buy today?

We’ve just heard some important news regarding banking regulations. You can read our full coverage here, but in a nutshell, the Australian Securities and Investment Commission (ASIC) will lose the power to oversee responsible lending practices across the banking sector. In effect, this means banks will no longer be punished if borrowers mislead the banks over their income or ability to repay their loans.

The market is certainly taking this news as excellent for the banks, with ASX bank shares leading the share market gains today. The CBA share price closed today’s session up 2.88%. The gains were more pronounced with the other three majors. The Westpac Banking Corp (ASX: WBC) share price was up 7.39%, while National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group Limited (ASX: ANZ) shares rallied 6.49% and 6.35% respectively.

So is this a good reason to buy the banks, or is the market overreacting here?

An ASX bank share bonanza?

Whilst this news is undoubtedly good for the ASX bank shares, I don’t think it will make a material difference to the companies’ long-term prospects. I’m not sure how many customers were battering down ANZ’s or Westpac’s doors with loan applications that turn out to be dishonest, but I doubt it’s in sufficient numbers that warrant a 6% increase in these bank’s market capitalisations.

My Fool colleague, Tony Yoo, quoted Karen Cox from the Financial Rights Legal Centre in his coverage earlier today, who stated the following about this development:

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

I agree.

The economic damage wrought by the coronavirus pandemic is the single largest threat the banks are facing right now. Evidence points to a sharp trend in Aussies’ increasing their savings rates in 2020 so far, quite dramatically too. That’s not congruous with an appetite for credit, which is what funds the banks’ profits. I see this regulatory change as a tinkering, rather than a game-changing policy. Will it cause societal harm? Possibly. Will it result in a windfall to the banks? I doubt it.

Therefore, I don’t think today’s change is a good reason to buy the banks right now, especially at their new, higher share prices. Instead, I would continue to stay away from this sector until conditions improve. And that might not be for a while.

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. 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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