Half the home loans on Westpac's mortgage book are interest-only but chief executive Brian Hartzer says that isn't a problem.
Prudential regulator APRA told the major banks six months ago to limit higher risk interest-only loans to 30 per cent of new residential mortgages.
Mr Hartzer confirmed to MPs on Wednesday that Westpac will meet the requirement but said the lender remained comfortable with a much higher overall rate with older loans included.
"I've personally spoken to the governor of the Reserve Bank, who has confirmed to me the Reserve Bank is not concerned about the credit quality of the Australian banks," Mr Hartzer told the House of Representatives standing committee on economics.
"It's a concern about the economic resilience of the nation in the event that interest rates rise."
Even with the RBA cash rate at a record low, record levels of household debt have constrained consumer spending - with data last week showing monthly retail spending fell for the most in four years in August.
The RBA is concerned that any rate rise would further dent weak spending elsewhere.
Nonetheless, Mr Hartzer told MPs in Canberra many interest-only borrowers were taking advantage of low rates to reduce their overall debt through additional payments.
"The amortisation of interest-only accounts is roughly similar to people who structure their loans as principal and interest," Mr Hartzer said.
The Australian Prudential Regulatory Authority set its target for interest-only loans in March, and Westpac - like its major rivals - reacted by hiking those rates in what Mr Hartzer called "a pricing signal" that makes them less attractive in comparison to principal and interest loans.
The move also increased the amount of capital the lenders generate.
"We have two objectives: one is to meet the APRA requirements; the other is make sure the shape of our book is resilient and our customers are heading in the right direction," Mr Hartzer said.
Asked by Liberal MP David Coleman what he would say to borrowers who found their loans becoming more expensive despite not being the target of the APRA limit, Mr Hartzer was succinct.
"Move to principal and interest: it's cheaper," he said.
Mr Coleman, the chairman of the standing committee on economics, asked Mr Hartzer what Westpac was doing to address any potential money laundering offences in light of allegations facing rival Commonwealth Bank.
CBA is facing Federal Court action over allegations it breached anti-money laundering laws through its intelligent deposit machines.
Mr Hartzer said Westpac had set a $4,000 limit on automated deposits, compared with $10,000 at CBA, and closely analysed deposit patterns for suspicious activity.
"It's a real scourge on society and a challenge for the whole economy," Mr Hartzer said of money laundering crimes.
Mr Hartzer was also asked about reports that Westpac approved a $30,000 loan to a customer who posed as an executive from rival bank ANZ using a photocopied driving licence.
"People do try these things on all the time and we do catch them and we do stop them," Mr Hartzer said.
"We can't guarantee that nothing's going to get through."
