Treasury rejects ‘impractical’ call for competition champion

In its response to the Productivity Commission’s (PC) draft report, the Treasury dismissed the recommendation for a “competition champion”, claiming that it “already performs the role”.

In its draft report, the PC recommended that the Council of Financial Regulators (CFR) be given authority to take a direct role in the assessment of competition impacts. The PC also called for increased transparency and a stringent assessment of proposed regulatory changes from the CFR.

The Treasury, however, questioned the necessity of such reforms, although it supported the PC’s call for “heightened attention by regulators for competition”.

“Treasury already has the role of championing competition issues at the CFR, and considers some of the draft recommendations impractical and unlikely to deliver the outcomes sought,” the submission reads.

“Treasury supports heightened attention by regulators to competition matters, and agrees it is worth regulators and the CFR considering options to improve transparency and accountability more generally in respect of macro-prudential policy.”

Treasury on APRA curbs

In its draft report, the PC claimed that the Australian Prudential Regulation Authority’s (APRA) decision to impose a 30 per cent cap on investment lending in 2014 and a 10 per cent cap on interest-only lending have inhibited competition.

The Treasury, however, defended the measures, claiming that the PC’s draft report “insufficiently reflects” the importance of the measures as a mechanism to improve lending standards.

“In our view, the draft report insufficiently reflects the need for timely interventions and APRA’s concurrent and longer-term efforts to improve lending standards in a more targeted manner.”

Despite acknowledging that APRA curbs have “potentially had some negative effects on competition”, it stated that the benefits of such measures have “outweighed the costs”.

“[In the] Treasury’s view, the financial stability benefits of the interventions have outweighed the costs.”

The government body also claimed that the PC understated the “significance of the risks that justified the interventions”, arguing that the benchmarks “appear to be have been effective” in alleviating “systemic risks”.

The Treasury stated that APRA’s measures helped moderate an “overly exuberant housing market” and sought to reverse the “deterioration in lending standards”.

Further, in its draft report, the PC suggested that APRA’s curbs were “blunt interventions” that have cost taxpayers an estimated $500 million annuity.

The Treasury refuted the PC’s claim, arguing that such a view was “significantly overstated”, further noting that such effects were “incidental”.

“Treasury [does] not agree with the suggestion in the draft report that APRA decision making should take account of incidental revenue effects, and notes that the claimed $500 million revenue cost of the 2017 macro-prudential interventions that is given prominence in the draft report is, at best, significantly overstated.”

On capital requirements

Moreover, the PC has alleged that “competition has suffered” as a result of “unquestionably strong” capital requirements imposed on banks.

The government body, however, highlighted the benefits of strong capital requirements, citing findings from the 2014 Murray Inquiry, which found:

• Capital is essential to absorb shocks and maintain investor confidence
• Financial crises are extremely costly to the financial system and wider economy
• The Australian banking system is highly dependent on foreign funding
• The Australian banking sector is highly concentrated

The Treasury denied the PC’s claim that strong capital requirements have stifled competition, arguing that they may have “improved competition” in the banking sector.

“In Treasury’s view, the policy case for requiring unquestionably strong capital of banks is compelling and stronger overall capital requirements have not come — and nor should they — at the expense of competition. If anything, they have improved competitive neutrality within the banking sector.”

The Treasury also rejected the PC’s claim that strong capital requirements may have resulted in higher interest rates charged by lenders. The government body again pointed to findings from the Murray Inquiry, which suggested that such requirements would “only have a small impact”.

“An incremental increase in capital requirements should only have a small impact on the interest rates charged by banks since it only affects the cost of a very small proportion of their overall funding.”

[Related: ASIC resistant to role as ‘competition champion’]