Speaking at the Australian Securitisation Forum 2017 on Tuesday (21 November), the chairman of the Australian Prudential Regulation Authority (APRA) said that the regulator was “keen to distance [itself] from any perception [that it is] responsible for the activities of any individual non-ADI lender, or for protecting their investors”.
Wayne Byres said that the extension of the regulator’s powers to cover non-banks was “very much a reserve power”.
“To be absolutely clear, we have no intention of taking on that role,” Mr Byres said. “For investors in non-ADI lenders, market discipline and caveat emptor remain the primary regulating influences. Our focus is very much on the aggregate.”
Mr Byres outlined that “well north of 90 per cent” of housing finance is currently provided by APRA-regulated lenders, and as such, the measures that have been taken impact the “vast majority” of mortgage lending in Australia.
However, the chairman added that when the flow of credit encounters regulation, it is “like flowing water encountering a barrier: one tries to find a way around the other”.
He added: “We therefore haven’t been blind to the fact that the more we lift the quality and/or reduce the quantity of lending in the regulated sector, the more that it provides opportunity for non-APRA regulated lenders to fill any unsated demand.
“We need to be mindful that, while from a financial safety (micro-prudential) perspective credit portfolios of individual regulated lenders will be improving, from a financial stability (macro-prudential) perspective the risk may just be moving elsewhere. Moreover, it could be concentrating risk in the parts of the system that are less transparent or receive less regulatory scrutiny, often short-handed as the ‘shadow banking’ sector.”
Noting that government has recently introduced legislation into Parliament that would provide APRA with a new power to use “should [it] think the aggregate impact of non-ADI lenders is materially contributing to risks of instability in the Australian financial system”, Mr Byres emphasised that the regulator saw it as “a reserve power”.
‘Clear threshold’ to be met before APRA intervenes
Mr Byres explained: “There is a clear threshold to be met before any rules could be applied to non-ADI lenders: that (i) APRA considers that the lending by non-ADI lenders contributes to risks of instability in the Australian financial system; and (ii) APRA considers that it is necessary, in order to address those risks, to make rules covering the lending of non-ADI lenders.
“That means that, most of the time, the power to impose rules will lie dormant: non-ADI lenders will go about their business as they have always done, unconstrained by any APRA rules. Importantly, non-ADI lenders will not be subject to any day-to-day prudential oversight by APRA.”
Mr Byres continued: “For those of you uncomfortable at the thought of APRA supervising non-ADIs, let me assure you the feeling is mutual. We are not seeking to expand our supervisory remit and, beyond collecting information that allows us to track aggregate trends in lending activity, we will not be undertaking any supervision of individual lenders. Indeed, we are keen to distance ourselves from any perception we are responsible for the activities of any individual non-ADI lender, or for protecting their investors.”
The APRA chairman added that any judgment on the extent of material risks to financial stability is “fraught with difficulty” as there is “no single measure of financial stability”.
Instead, Mr Byres said that financial stability is “necessarily a matter of judgment, taking into account a wide range of factors”.
However, the APRA chairman said that the regulator would “undoubtedly be better placed” to make good judgments if [it had] good data”, so the new legislation aims to provide APRA with such data to help it track “overall lending trends”.
“We are giving thought to what that data might entail, and will consult with the industry before any new requirements are introduced,” the chairman said, adding that APRA will mainly be seeking to observe the volume and nature of lending that is occurring, and not the traditional prudential metrics that “we collect from ADIs”.
While there may be uncertainty in the minds of investors as to the regulatory framework that would apply to non-banks, Mr Byres said that he could not “dispute that might be the case”. But he clarified that the shadow banks would “not be prudentially supervised and that APRA’s rule-making is a reserve power”.
Mr Byres went on to outline that should APRA get to the point where it needed to bring in rules for non-banks, this would only be done following a consultation process.
He concluded: “Let me finish on this issue by noting that, as things stand today, we do not foresee the need for any new non-ADI lender rules to be introduced the moment the legislation is passed. Our immediate priority will be to consider how to identify the right entities to collect data from, and the data we want to collect. We look forward to a constructive engagement with the industry on those matters.”
Mr Byres conceded that APRA has “certainly been more interventionist than [it] would normally wish to be”, but added that as risk within the lending environment had increased, he believed the regulator’s actions have “helped to strengthen lending standards to compensate”.
APRA ‘to devote a large portion’ of resources to housing in 2018
“We will need to continue to devote a large portion of our supervisory resources to housing in 2018,” Mr Byres said. “The broader environment of high and rising leverage, encouraged by historically low interest rates, requires ongoing prudence. It is easy to run up debt, but far harder to pay it back down when circumstances change.
“It is in everyone’s long-term interest to maintain sound standards when times are good — that is, after all, when most bad loans are made. Moreover, sound lending standards are an essential foundation on which the health of the Australian financial system is built, regardless of whether the loans are held on balance sheet or securitised and sold.”
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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.