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Smaller banks on edge watching APRA’s next steps

The chief of a banking industry body has warned any further lending controls APRA decides to implement have the potential to choke competition.

Michael Lawrence, chief executive of the Customer-Owned Banking Association (COBA) appeared before the House of Representatives tax and revenue standing committee on Wednesday (3 November), for its ongoing inquiry into housing affordability.

Reflecting on APRA’s recently increased minimum interest rate buffer, the industry body chief raised concerns around any further restrictions that could follow.

APRA has not dismissed the possibility of any further steps, while the Reserve Bank has discussed potential tools such as limits on loans with high loan-to-valuation ratios or debt-to-income ratios.

“What are we actually trying to target here to make sure that we don’t have a blunt instrument that disproportionately impacts [us],” Mr Lawrence said.


Mr Lawrence reflected on the 10 per cent cap on investment lending imposed on lenders in 2014 as a range of measures to reduce higher-risk lending, before it was removed in 2018.

According to the COBA CEO, the tool had unfairly disadvantaged smaller and regional-based banks, despite the issue around investor lending being prevalent in Sydney and Melbourne.

“If you’re a smaller member like ours and you’ve got a $200 million portfolio, you’re going to hit your 10 per cent cap a lot quicker than someone who’s got a $500 billion portfolio,” he told the committee.

“So these blunt instruments… you’re applying it to someone in Warwick, in rural Queensland. Was the issue in Warwick? Was the issue in some of our regional centres? No.”

He added members had been forced to reject loan applications from existing customers and lose business to local major bank’s branches.

Mr Lawrence also reflected on the impact of regulatory changes among other pressures on ongoing consolidation in the mutuals and credit union sector. Around 30 years ago there were around 350 mutual banks, he recounted, before it was slimmed down to around 150 in 15 years, and eventually plunged to its current count of around 60.

“It’s absolutely a competition issue. And it poses an enormous amount of pressure on our sector,” Mr Lawrence said.

The Reserve Bank, which has worked with APRA to monitor the housing markets and decides on macro restrictions, has admitted that such tools could come at a cost to competition among banks.

However the central bank stated the benefits of supporting financial stability could outweigh any damages to competition.

APRA is meant to release an information paper outlining its use of macroprudential tools before the end of the year.

Coming interest rate rises don’t faze banks

Mr Lawrence was also asked how the customer-owned banks would fare if the Reserve Bank were to hike the interest rate, which some analysts have forecast for next year.

He responded by saying banking is a “heavily regulated sector” with boundaries already set to account for such a scenario.

Pointing to APRA’s rules for credit provisions and responsible lending obligations, Mr Lawrence also reflected on the recent buffer change.

“What that is effectively saying is that… we will assess your ability to repay 3 per cent or above what the standard variable rate is at the moment,” Mr Lawrence explained.

“So with interest rates to increase, you aren’t going to get into distress. There are many processes that the banks go through to ensure that people can afford the loan that they’re going into.”

Get national cabinet on housing affordability, says COBA CEO

The COBA CEO also called for greater coordination between stakeholders and for the national cabinet to make housing affordability a top priority on its reform agenda.

“Housing is not the sole responsibility of one stakeholder. The federal government plays a role, the state governments play a role, local government play a role, the private sector, and the list goes on,” he said.

“I think that it needs coordination and it needs coordination at the highest level.”

He added there is “no one silver bullet”.

“There’s planning, there’s zoning, there [are] taxes, but supply itself is a real issue here in Australia and we’ve got to address the supply issue,” Mr Lawrence said.

“But I think the other thing I would add with the importance of having this elevated to the National Cabinet is, as with anything you’re trying to solve, it’s the unintended consequences. And so you need all the stakeholders at the table so as to avoid any unintended consequences of decisions.”

[Related: Home lending continues sustained growth: APRA]

Smaller banks on edge watching APRA’s next steps

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