APRA rejects claim it needs to do 'a better job', blames ASIC

Australian Financial Review Mar 28 2018 12:56 PM

James Frost

Australian Prudential Regulatory Authority chairman Wayne Byres has denied his organisation was unable to keep the banks in line and said there is little evidence of a lending free-for-all.

After more than an hour of questioning of about revelations of lax lending standards from the Hayne royal commission, he told the House Economics Committee  that while there was a small cohort of borrowers who would have difficulty servicing loans when rates move higher there was no sign of a broader problem.

"We are still dealing with an environment in which arrears are not particularly high, they are higher than they have been for a while, but if lending was a free-for-all in the way that some are suggesting I think arrears rates and other things, indicators of financial stress, would be much higher than what they are now" Mr Byres said.

According to the latest RBA data the proportion of impaired housing loans as a proportion of all loans is 0.15 per cent. The RBA acknowledged that this had increased slightly but said the loans were mostly well secured and the overall share remained low.

The assessment is in stark contrast to reports written by bank analysts about "liar loans" and the findings of the royal commission which implied mortgage brokers routinely underestimated the expenditure of borrowers in order to secure bigger loans and therefore bigger commissions.

Sarah Henderson MP, in her role as the new chairman for the committee, honed in on a number of shocking case studies from the royal commission that indicated conflicts of interest, examples of misconduct and cases of systems failure within the banks were not in fact isolated but systemic.

"How can you give the Australian community the confidence that you are up for this task?," Ms Henderson asked.

APRA chairman Mr Byres explained that the chief banking regulator had been engaging the largest lending institutions about their lending standards for several years and many of the issues raised were the responsibility of the corporate regulator, the Australian Securities and Investments Commission.

"The prudential standards are about safety ... boiled down to its absolute essence is the question 'Is the money of depositors safe" and I don't think anyone has drawn the conclusion that that isn't the case ... we shouldn't suggest that there is any threat at all to depositors money here," Mr Byres said.

APRA has been talking to the banks to about lending standards since 2014-2015, it sent auditors to the largest lending institutions in 2016 to identify gaps in reporting and is preparing to launch a final round of reviews to ensure banks have improved their systems where necessary.

'More nuanced and more complex'

Mr Byres was also forced to defend the bouts of macro-prudential intervention including the 10 per cent cap on investor loan growth and the 30 per cent cap on interest-only loans which the Productivity Commission found may have contributed to a lessening of competition.

Matt Thistlewaite MP said the regulator's decision allowed the banks to lift rates across the board and pushed up the cost of living for everyone with a mortgage.

"It is more nuanced and more complex than saying that 30 per cent benchmark led to those interest rate increases" Mr Byres said.

Mr Byres said there was fierce competition in the lower end of the market which the regulator flagged as a potential risk to financial stability.

"That competition in our view was detrimental to the health of the financial systems and detrimental to the community ... we had too many borrowers that just didn't pay back a cent on their loans and that is unhealthy in the long run" he said.

Mr Byres speculated that if APRA didn't intervene then the Reserve Bank of Australia may have been forced to raise interest rates across the board and argued that to the extent that APRA's intervention stopped the erosion of lending standards it has had a positive impact on competition.

In his opening statement Mr Byres said the interventions had achieved their purpose and noted the quality of new lending had improved markedly however he did say that more work needed to be done to "make sure the improvements in policies are truly embedded into ongoing practises".

Mr Byres was asked to elaborate on comments made before the House Economics Committee last month when he said the macro-prudential limits were "reaching the end of their useful life".

Mr Byres said the 10 per cent cap on investor lending announced in December 2014 was likely to be the first measure to be unwound.

Mr Byres said he couldn't foreshadow the removal of the 30 per cent cap on the flow of new interest-only loans which was announced 12 months ago as "we've only just got that in place".