APRA’s “rigorous and effective” intervention and management of the “growing risks” in mortgages have helped make the financial system “more resilient”, the APRA Capability Review has found.
The conclusion comes in the APRA Capability Review, which was called by government earlier this year to assess the regulator’s capacity and capability to promote financial stability within its frameworks and its preparedness to address issues raised by the royal commission and in “an environment of growing complexity and emerging risks for APRA’s regulated sectors”.
The review was led by the former chairman of the Australian Competition and Consumer Commission and president of the National Competition Council, Graeme Samuel; alongside former Westpac senior executive Diane Smith-Gander, and the Reserve Bank of New Zealand’s former head of financial stability, deputy governor, and acting governor, Grant Spencer.
It reportedly involved reviewing more than 1,000 APRA documents, analysis of information from seven international “peer regulators”, meeting with APRA’s senior leaders on over 30 occasions, “extensive and insightful consultations” with more than 30 stakeholders, hosting five roundtables with “key industry experts and international prudential regulators”, evaluating 19 written submissions, as well as a “quantitative and qualitative staff survey and focus groups”.
The final report of the Australian Prudential Regulation Authority (APRA) Capability Review, released on Wednesday (17 July), noted that APRA’s approach to traditional financial risks is “rigorous and effective”.
According to the Capability Review panel, APRA’s focus on housing risks is “entirely appropriate” given that housing represents 64 per cent of assets in the Australian banking system in dollar terms and 36 per cent of the banking system when considered in risk-weighted asset terms.
The panel said that APRA had “developed strong capabilities” in managing risks emanating from exposures to housing and had “mobilised significant resources in the past few years to address concerns about increasing risks in residential mortgage books”.
For example, it highlighted that between 2014 to 2018, APRA “steadily strengthened system-wide mortgage lending standards, reversing an earlier erosion in policies and practices that had flowed from strong competitive pressures”.
Some of APRA’s recent interventions in the residential mortgage market include restrictions on investor and interest-only lending, which the panel said “have had the desired effect of reducing risk that had been building up in residential mortgage books”.
“These measures have strengthened the resilience of individual ADIs and promoted the stability of the financial system overall,” the report reads.
However, the final report noted that while APRA has “appropriately taken a risk-based approach in supervising credit risk, increased capacity in non-retail credit is warranted,” it concluded.
It also suggested that the prudential regulator “needs to be more transparent about its ownership and approach to these policies, including the important supporting role of the Council of Financial Regulators”.
The capability review report concludes: “APRA’s efforts to build capital requirements, strengthen balance sheets and tighten lending standards in the residential mortgage market in the past few years have made the financial system more resilient. But this is no guarantee against a financial failure or crisis.
“APRA needs to continue to enhance its preparedness for a market-wide crisis that affects multiple entities and its capacity to respond to a single distressed entity in collaboration with the Council of Financial Regulators’ members.”
In total, the review put forward 24 recommendations to “ensure that APRA is best placed to deal with its future environment and the challenges which lie ahead”.
Nineteen recommendations are made to APRA and five recommendations require government action.
Among the biggest changes the review puts forward in its recommendations to APRA are:
The five government recommendations centre on:
The review concluded: “There are no simple solutions to raising APRA’s capabilities. It operates in a complex, uncertain and dynamic environment. It requires highly skilled staff with good judgment and courage. They need to be supported by strong leadership and technology.
“APRA also needs to use its independence, powers and authority to greater effect to shape its future. The areas of improvement identified in the review are mostly for APRA to respond. Cultural change is necessary. A culture that has facilitated success in regulating traditional financial risks can be a constraint on innovation and capability development. There needs to be more internal challenge of management to ensure that the organisation adapts with developments in the financial system and addresses the breadth of its mandate.
“APRA needs to be more transparently assertive in its communication. This is particularly the case with regulated entities but also applies to communication with the Parliament and the public so that APRA can better define its authority and shape its own future. These changes need to come from the top and be embraced throughout the organisation.”
APRA has said that it supports all 19 recommendations, with APRA chair Wayne Byres saying the report was “comprehensive and ambitious” in its views of APRA’s future remit and required capabilities.
However, he warned that these should not be at the cost of APRA’s strong capabilities in financial safety and stability.
“The report highlights the increasingly complex industry dynamics in which APRA operates and that the expectations of its role and mandate have increased.
“Appropriately, the report notes APRA has not stood still in the face of these developments, but highlights the need to accelerate the necessary changes if APRA is to remain a successful prudential supervisor into the future,” Mr Byres added.
“APRA is committed to ensuring it is fit for the future, and the panel’s recommendations support this. APRA will continue to focus on its primary responsibility to protect the financial wellbeing of the Australian community as it implements the changes that have been recommended and those APRA already has underway,” he said.
Treasurer Josh Frydenberg has already agreed to all recommendations of the report.
He said: “In response to the review, the government will:
Mr Frydenberg continued: “An independent, robust and effective prudential regulator is essential for safeguarding the financial safety and the financial stability of the Australian economy.
“The government is confident that the response it has announced today, alongside action from APRA, will ensure that APRA is in a position to effectively respond to these new challenges and deliver on its mandate.
“The government would like to thank the expert panel that conducted the review.”
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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