APRA, the chief banking regulator in Australia, is being guided to a period of introspection over its approach to prudential supervision of the banking industry.
The banking regulator's actions with a macroprudential bent over recent years have drawn scant praise and much criticism from the Productivity Commission in its final report into Competition in the Australian Financial System.
Overturning any received wisdom that APRA is pretty much beyond reproach, the commission's panel has taken aim at the super profit for banks resulting from APRA's actions to slow interest-only lending on residential property in early 2017.
This measure, the report contends, "resulted in banks imposing higher interest rates on both new and existing residential investment loans, despite the regulatory objective being to slow only new lending.
"This led to a windfall gain for the banking sector."
Up to half of this gain "is in effect being paid for by taxpayers, as interest on investment
loans is tax deductible," the report explains.
The Commission estimated that the cost borne by taxpayers as a result of APRA's intervention was up to $500 million a year.
"Competition between lenders was restricted, and there was limited competitive variation
in lenders' responses to the regulatory intervention," it said.
Reviewing APRA's approach, the report finds that "APRA's interventions did not address the underlying cause of poor lending."
The 2014 investor lending intervention, it found, "included increased scrutiny of loan repayment affordability."
The commission said it "believes such measures (which directly target lending standards), in conjunction with proposed risk weights (which recognise the risks inherent to investor and interest only loans), will [from now on] serve as more sustainable deterrents of excessive risk taking behaviour.
The industry's "poor lending standards posed an immediate risk to the Australian
economy and regulatory overhaul (as is proposed for risk weights) can take years.
"In the Commission's view, swift action by APRA was appropriate.
"Our criticism is not that action was taken, but rather that it is unclear the extent to which
alternative interventions, that would have less anti-competitive consequences, were
genuinely considered.
"And, if they were considered, it is unclear why they were dismissed.
"The concerted view … against considering predictable costs of an intervention is a
matter that should be addressed, by the Council of Financial Regulators or by the government.
"International experience shows that alternative interventions exist and have been implemented overseas."