Now is not the time to backtrack on lending policies, APRA chief Wayne Byres warned on Friday."We find ourselves at an interesting juncture. With lending standards more robust, we have been able to remove the major temporary benchmarks that we introduced in earlier years," Byres told the European Australian Business Council in Melbourne."The downward adjustment in prices has occurred in an orderly fashion and been positive for stability. "However, it is worth remembering that the original risks we were concerned about in 2014 - high prices, high debt, low interest rates and subdued income growth - have not gone away, and in some cases increased. "When it comes to the supply of credit, it would therefore be unwise for lending standards to be allowed to erode again as a means of generating lending growth. And on the demand side, it would be unhelpful if recent (and prospective) interest rate reductions led to a resurgence in speculative activity."Byres aired concerns over industry profitability in the context of the very low interest rate environment in Australia.This "will see margins squeezed, adding to the headwinds from slow lending growth. Profitability, and therefore capital generation, will come under more pressure. "Given their different funding profiles, these trends may well impact smaller banks more forcefully than larger ones, reducing the ability of the former to apply competitive pressure to the latter."Even without a period of stress, we will also need to think harder about the impact on business models and business lines of a very low interest rate environment persisting for a lengthy period of time."Byres also turned to the topic of the Reserve Bank of New Zealand's drive for much higher industry capital."There has been some suggestion that this reflects some kind of falling out between us, or evidence of trans-Tasman one-upmanship. In fact, the opposite is the case."In New Zealand's case, there is an understandable desire to have greater ex ante protection in the form of higher capital on the ground in New Zealand. "And in APRA's, we have sought to make sure that our changes in relation to intra-group exposures allow New Zealand's objectives to be achieved without jeopardising the unquestionably strong capital requirements that ultimately protect Australian depositors. "The result will, in all likelihood, be higher capital requirements in New Zealand, funded by the retention of profits from the New Zealand business. We are entirely comfortable with that."