Clik here to view.
Spotlight shines on shadow banking
The Australian 12:00am July 17, 2017
Michael Roddan
Tough new powers for the prudential regulator to target the shadow finance sector will allow it to slap new rules on individual non-banks, the entire industry, or “specified” classes of lenders, as part of a crackdown on potential sources of instability in the financial system.
The Turnbull government will today release draft legislation for consultation on its budget commitment to give the Australian Prudential Regulation Authority new powers over the activities of non-bank lenders.
Currently APRA only has powers to regulate authorised deposit-taking institutions, which look after customer money that has been deposited with a lender. The shadow banking sector has remained outside the scope of the regulator, even in cases where the sector may be materially undermining the strength of the financial system.
APRA has launched several new measures aimed at limiting excessive lending in the Australian mortgage market, following rapidly rising house prices and surging household debt.
The regulator has made banks stick to strict limits on the amount of lending to investors and the rate of interest-only lending, and follow rules regarding borrowers with small deposits. But the move to de-risk the financial system has been somewhat ineffective as borrowers skirted tougher lending restriction by flooding unregulated non-banks with loan applications.
Treasurer Scott Morrison in May announced a multi-million-dollar boost for APRA to use new powers to better control lending by companies “outside the traditional banking sector” that don’t currently accept deposits from customers. According to the explanatory memorandum for the draft legislation, APRA’s new rules will allow it to target companies engaged in any form of lending, either “directly or indirectly”, that result in the funding or originating of loans or financing.
APRA will be able to make rules for individual companies, all non-banks, several lenders, or a specified class of lenders, if the regulator considers behaviour by one or more companies “contribute to risks of instability in the Australian financial system”.
Before making a rule, APRA must consult with the Australian Securities & Investments Commission, which monitors compliance with responsible lending laws in the non-bank sector. APRA will also consult with the Reserve Bank, but will use its “independent judgment” as to how and when to deploy its new powers. APRA will be able to force non-banks to cease financing activities, and penalties will apply for lenders that break the rules.
The level of scrutiny falling on the shadow banking sector has increased rapidly this year.
Recent figures from the Reserve Bank show housing lending increased 50 per cent faster than the rate revealed in separate APRA figures, suggesting a third of housing lending was now flowing to the non-bank sector. The RBA said it was aware of borrowers increasingly using “intermediaries who connect borrowers with non-bank lenders”, which made gauging the scale of the lending difficult.
When APRA slapped a 10 per cent growth limit on bank lending to investors, offshore buyers and other property investors rushed to financiers that operate outside the scope of the regulator, sidestepping attempts to cool the housing market.
Non-bank lender Prime Capital recently came into focus for writing a working capital loan — loans for business borrowers — to a foreign buyer who was using the funds to purchase property in inner-city Brisbane.
APRA recently said it would take the scalpel to “warehouse” facilities to see if they were growing at a faster rate than lenders’ own loan portfolios. Non-banks, which account for about 1 per cent of Australian mortgage lending, use short-term bridging finance — known as warehouse finance — provided by major lenders to write home loans, which are then pooled into mortgage bonds and sold to investors.
Mortgage brokers have been funnelling borrowers into smaller unregulated lenders after the traditional sector was forced to hike interest rates to dampen demand for investor loans and interest-only products. About 50 per cent of all loans in the $1.6 trillion mortgage market are written by brokers.
According to the RBA, non-banks had about $140bn of assets as of last June. Some construction companies unable to secure finance through banks have looked at non-bank lenders for funding, which has worried the prudential regulator as it attempts to secure a glut of apartments on the east coast.