Appearing before the committee on Wednesday (28 March), the Australian Prudential Regulation Authority (APRA) faced intense scrutiny over its macro-prudential measures, which placed a 10 per cent on investor loans and 30 per cent cap on new interest-only loans.
APRA chairman Wayne Byres was questioned by committee member and Labor MP Matthew Thistlethwaite over the effect that the measures have had on interest rates, and therefore on the cost of living.
Citing the Productivity Commission’s draft report on competition in the financial system, Mr Thistlethwaite alleged that lenders increased interest rates on all loans as a result of the introduction of the interest-only (IO) cap, which he said “pushed up the cost of living for Australian households”.
The claims echo those put forward by the committee last year, when it reviewed the regulator’s 2016 annual report.
Despite acknowledging that the cap had some effect on the banks’ decision to hike rates, Mr Byres argued that the banks’ changes to rates were motivated by more than just the IO cap.
“It would be wrong to assert that it was solely and only the result of that measure,” he said.
“Banks have a range of other factors impacting on their pricing, and some of those are other regulatory measures, so I don't want to suggest that regulations are not playing a role here.
“But I think it is more nuanced and more complicated than just saying that the 30 per cent benchmark led to those interest rate increases.”
Mr Thistlethwaite also reiterated concerns made by the Productivity Commission suggesting that the regulator’s measures have “stifled competition”.
“[It’s] actually stifled competition because [they have] pushed up the costs with the big banks, but a potential customer has been unable to go to their competitors because their competitors can't grow their book either. Hasn't there been this perverse effect of stiffing competition?” the Kingsford Smith MP asked.
The APRA chairman conceded that the measures had slowed competition, but claimed that some competition was “detrimental to the health” of the financial system.
“We have been unapologetic in saying that the way competition was playing out was [resulting] in poor lending and so… we push[ed] back on that”.
Mr Byres contented: “[That] competition was, in our view, detrimental to the health of the financial system in the long run and detrimental to the community.
“One of the reasons we chose that measure (and the way we designed that measure) was [because] the 30 per cent benchmark was exceeded primarily by the largest banks.
“The smaller banks tended to already be operating below that level and, in some cases, significantly below that level.”
Mr Byres noted that the regulator sought to limit new IO lending, as it viewed such loans as “unhealthy in the long run”.
“[You] are correct in saying that the goal was to reduce the overall amount of interest-only lending in the system because that was seen to be getting to levels that were quite excessive. We had too many borrowers who just didn't pay a cent back on their loans, and that was just unhealthy in the long run.”
However, speaking at The Adviser’s Better Business Summit earlier this month, NAB chief economist Alan Oster claimed that regulatory restrictions on interest-only (IO) loans were overblown.
“I think everyone sort of sells the argument about [interest-only loans], as if it’s a regulatory thing, that they’re more risky — that’s not true in Australia. That is factually not true, but people are saying that it’s a bubble,” Mr Oster said.
The chief economist said he believes that while regulators increasingly favour the use of macro-prudential tools, a distinction should be made between perceived lending risks and over-stimulation in the market.
“There’s a confusion between a regulatory thing that says this is more risky and therefore I should do ‘x’ and something else that says, ‘I want to take some heat out of the market’, which is [traditionally] what interest rates did. But now that [regulators are] using [macro-prudential measures], they’ll probably sit on interest rates.”
Mr Oster added that he’s “not sure” why Mr Byres has raised concerns over IO lending, claiming that data suggests otherwise.
“I’m not sure, but I’m more than happy to show him some data that says it’s safer. [Interest-only loans] have always been safer,” Ms Oster continued.
When asked when APRA would lift the caps, Mr Byres stated that the caps were temporary measures designed to “dampen some of the excess competitive spirit”, stating that the investor benchmark is “becoming redundant”.
“They are intended to be a temporary measure just to dampen some of the excess competitive spirit that was producing lower quality lending and higher risk lending.
“ I said in this room a month or so ago, the 10 per cent investor growth benchmark that we put in place in December 2014, I think that is becoming redundant,” he continued.
“Who knows how things evolve, but I think we're in a position where that can be removed sooner rather than later.”
The APRA chairman, however, suggested that the regulator has no immediate plans to remove its IO benchmark.
“The 30 per cent interest-only benchmark is one that we've only just got in place. The industry and the market is still settling,” he said.
“I wouldn't be foreshadowing removing that in the short term, but obviously we watch and see how the markets evolve.”