In its submission to the Productivity Commission’s Competition in the Australian Financial System inquiry (the draft report of which is expected early next year), the Australian Prudential Regulation Authority (APRA) outlined how it is “balancing the stability and competition components of its mandate”.
One example of this fulfilment, it said, was the prudential measures brought in for residential mortgages.
APRA highlighted how it wrote to all authorised deposit-taking institutions (ADIs) in December 2014 to “reinforce its expectations for sound residential mortgage lending practices and signal an increase in the level of supervisory intensity in this area”.
Adding that it then went on to set a 10 per cent growth rate limit for investor lending and followed this with a 30 per cent cap on new interest-only lending in March, it suggested that these actions were necessary to improve the mortgage market.
It wrote: “These actions were taken in an environment of accelerated residential mortgage portfolio growth and against a backdrop of historically low interest rates and high levels of household debt.
“In APRA’s view, competition among ADIs had contributed to underwriting standards for residential mortgages being eroded to an extent which, if left unchallenged, would have the potential to threaten the stability of the financial system.”
The regulator stated that these restrictions were applied on a “competitively neutral basis across all ADIs”, but noted that smaller entities, with “less systemic impact”, have generally been given more flexibility in the manner and time in which they are expected to adjust their lending practices.
It added that since APRA’s intervention, the market share of the major banks and other ADIs are “almost unchanged” (albeit with a slight increase for smaller ADIs).
The submission continued: “APRA’s interventions are designed to result in more favourable long-term competitive outcomes for consumers, by ensuring that competition will occur on a more sustainable basis.
“Although these temporary benchmarks on investor lending growth and the proportion of interest-only lending limit the extent to which individual ADIs can seek to gain market share from one another, many ADIs are already operating well below the benchmarks (so have the capacity to expand their share should they wish to do so).
“Further, APRA has only sought to constrain those areas of lending that are considered to be of higher risk (for example, beyond sensible serviceability requirements, traditional lending on an amortising basis to owner-occupiers is unaffected).”
APRA focusing on 'the long-term needs of the Australian community'
While some have praised APRA’s “extraordinarily successful intervention” to discourage investor lending, others have questioned whether they are being used by banks as a driver for profit.
Last week, the chair of the standing committee of economics, David Coleman MP, asked APRA chairman Wayne 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).
But Mr Byres added: “I think one of the issues that banks have is that we've asked them to slow down certain sorts of lending.
“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.”
Trevor Evans MP also 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, is 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 submission to the Productivity Commission concluded: “APRA is of the view that, with the right balance, stability and competition are mutually reinforcing objectives. However, competition can also lead to instability in the financial system and there are times where it is important for APRA to actively temper competitive forces.
“Periods of excessive and unsustainable competition can result in financial institutions inappropriately pricing risk or unintentionally accepting excessive risk in order to gain or retain market share. Facilitating an appropriate balance between financial stability and competitive dynamics requires a considerable amount of judgement in understanding and weighing potential tradeoffs when considering action."
It continued: “In making these judgements, APRA also seeks to maintain a sustainable balance between its objectives, focusing not purely on the circumstances of the day, but on the long-term needs of the Australian community.”
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Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.