The Australian Prudential Regulation Authority has faced heavy scrutiny over lenders potentially using the crackdown on interest-only lending as a cover for back book repricing.
The House of Representatives’ review of APRA’s 2016 annual report, held on 13 September, saw APRA chairman Wayne Byres under fire over lender movements to increase interest rates for both new and existing clients with interest-only (IO) loans.
Since the introduction of APRA-mandated speed bumps to limit new IO lending to 30 per cent of lenders’ loan books in March, Australian lenders have engaged in a series of interest rate repricing for both new and existing IO borrowers.
David Coleman MP, chair of the standing committee, gave the example of CBA, which in June raised IO rates by 30 basis points for both new and existing borrowers.
CBA at the time said: “We are supportive of the banking regulator’s moves to manage the level of growth and resiliency in the housing market. To meet our regulatory requirements, variable interest-only home loan rates for owner-occupiers and investors will increase by 30 basis points.”
In the tense hearing, Mr Coleman put to Mr Byres that CBA’s statement was a “very binary statement” and asked him whether the statement was true, given that APRA’s IO crackdown pertained only to new lending.
Mr Byres responded by noting that APRA has “been blamed for many things” and acknowledged that “those changes would not have happened when they did and as they did had it not been for the range of regulatory initiatives”.
However, Mr Coleman argued that it would be “very, very reasonable” for the APRA chairman to comment on whether CBA’s reasoning was valid. He said: “I do think that it is quite difficult to sustain an argument that it is true."
Mr Coleman questioned further whether CBA, and other lenders’ back book IO repricing practices, were “actually opportunistic changes” that had effectively used the APRA speed limits as excuses to garner profit. He called on Mr Byres to clarify whether lenders had put out “misleading” statements by using the APRA crackdown as reasoning for back book repricing.
Deflecting the question, Mr Byres said that APRA would wait to see what came out of inquiries by the ACCC and the Australian Securities & Investments Commission (ASIC). He noted that ASIC would have “great interest” in the matter.
“I think one of the issues that banks have is that we've asked them to slow down certain sorts of lending,” Mr Byres said. “They've used price and other things to do that and sometimes they've been overly successful in what they've… It's difficult to predict these things in advance as to whether some particular action is the bare minimum that needs to be done to achieve the regulatory objective.”
One-size-fits-all policy condemned
The IO speed limits, and earlier 10 per cent growth limits on investor lending, were also under fire for their alleged impact on smaller players. Trevor Evans MP questioned whether the limits risked “entrenching market dominance” by constraining potential growth of new entrants or smaller lenders attempting to enter the market.
Mr Byres acknowledged the potential risk. He said that the issues raised were “legitimate ones” and admitted that “to the extent that you constrain part of a portfolio to within some limited capacity, then inevitably you are limiting the extent to which competition can happen”.
APRA’s focus, however, was to address the “competitive dynamic” within Australia’s lending landscape that had seen “excessive” competition by way of lending standards, rather than pricing or service.
The APRA chairman noted that the policy had a stratified approach, wherein “we have been more lenient on the smaller institutions than in the large”, and added that there are some “very small institutions” that will “bobble up and down” above the 10 per cent investor growth benchmark.
Mr Byres concluded: “When we thought about how to apply these things, we stratified the portfolio of the lenders that we regulate. There's the top 15–20 where we've been pretty firm; they have to meet their obligations, they have to meet them by deadlines and there's very little leeway given.
“There's a middle tier where… we've given a bit more leeway, particularly in terms of time to adjust and then there's… the very small tier where you recognise that there is some difficulties of applying a one-size-fits-all approach.”
[Related: APRA limits ‘extraordinarily successful’]