Speaking before a Senate committee this week, Australian Prudential Regulation Authority (APRA) chairman Wayne Byres admitted that financial institutions “have a great deal of work to do to restore trust” but stressed that the industry is “financially sound” and “stable”.
He attributed the stability to “considerable policy reform and hands-on supervision” by APRA but noted that circumstances could change.
“We don’t know when the next period of adversity will arrive or what will trigger it, but when it does arrive, we need to have done what we could to strengthen the financial system so that it can continue to provide its essential services to the Australian community when they are needed most,” Mr Byres said.
For example, Mr Byres highlighted the possibility that Australia’s financial system will look “very different in five years’ time relative to the way it looks today” due to advancements in technology; and while there are benefits to be reaped from technology, it will also introduce new risks such as cyber attacks.
He said that the “accelerating threat of cyber attacks to regulated entities” has pushed APRA to propose its first prudential standard on information security, which is currently being consulted. Mr Byres expects the new cross-industry standard to come into effect on 1 July 2019.
The APRA chairman’s remarks about the impact of the royal commission follow those of Reserve Bank of Australia governor Philip Lowe, who recently pointed out the risk of there being an “unanticipated tightening in financial conditions through reactions to the royal commission”, a sentiment similarly communicated by investment bank UBS, which expects credit growth to “slow sharply”.
Global credit ratings agency Moody’s Investor Service also joined the chorus of analysts forecasting tighter mortgage policies as a result of the royal commission’s intense scrutiny of bank lending.
“Bank profit remained supported by low impairment charges and ongoing benefit from earlier re-pricing of some mortgage products. However, we expect margins to remain under pressure, given that slower credit growth in the next 18 months could intensify competition at a time when wholesale funding costs are likely to rise,” Moody’s analyst Daniel Yu said.
While the APRA chairman declared the current status of the financial services industry as stable, he said that the regulator is not yet prepared to “dial back [its] supervisory intensity” as there is more to do. He signalled that APRA will continue to place pressure on financial institutions to reduce their reliance on the Household Expenditure Measure (HEM) benchmark to assess serviceability, as well as to reform remuneration practices and to establish a more “holistic approach” to assessing senior executive performance.
“We have indicated that we are minded to strengthen the prudential framework to give better effect to the principles we want to see followed — less rewards based on narrow and mechanical shareholder metrics, and greater exercise of board discretion to judge senior executive performance more holistically,” Mr Byres said.
According to the chairman, there has been a “lift” in lending practices across the industry, subsequently leading to APRA removing the 10 per cent benchmark on investor loan growth, which the regulator introduced in 2014 as part of its efforts to reduce higher-risk lending.
However, lenders are still required to seek exemption individually by confirming that:
- lending has been below the investor loan growth benchmark for at least the past six months;
- lending policies meet APRA’s guidance on serviceability; and
- lending practices will be strengthened where necessary.
The prudential regulator also expects ADIs to develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers.
Treasurer Scott Morrison recently announced the introduction of new legislation into Parliament that would enable the appointment of a second deputy chair for APRA. The legislation is aimed at maximising the skills and capabilities available to the prudential regulator.
“Our financial regulators need to have the capacity available to ensure our financial system remains strong and stable. That’s why we are acting to further strengthen APRA’s ability to do its job,” Mr Morrison said.
“The appointment of up to two deputy chairs will provide greater flexibility in the way in which APRA is governed and the allocation of responsibilities to each APRA member. This helps to maximise the skills and capabilities available to APRA within its leadership.”
The Treasurer revealed his intention to nominate John Lonsdale, who is currently deputy secretary of Treasury, to become the additional deputy chair. The appointment of Mr Lonsdale will be for a five-year term and is conditional on the approval of the Governor-General and on Parliament agreeing to the proposed amendments to the APRA Act.
In concluding his address to the Senate committee, Mr Byres said that the prudential regulator is prepared for the Banking Executive Accountability Regime (BEAR), slated to commence in about a month, which will examine APRA’s performance. He noted, however, that the regime will not in isolation “remedy perceived weakness in financial sector accountability”.
“We have encouraged all regulated entities — not just ADIs — to use the new regime as a trigger to genuinely improve systems of governance, responsibility and accountability,” the chairman said.
He also pointed out that APRA, along with the broader Australian financial system, will face “intensive scrutiny” from the International Monetary Fund as part of its 2018 Financial Sector Assessment Program, which will investigate vulnerabilities in the Australian financial sector and the quality of regulatory oversight arrangements.
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