RBA boss calls for tougher penalties for banking misconduct

Reserve Bank governor Philip Lowe last night warned that legal penalties for banking misconduct would need to be stiffened as a prerequisite for restoring public trust in the industry.

Speaking at a CEDA annual dinner in Melbourne, Lowe said it was a fact that the consequences for bankers not doing the right thing "have, in some cases, been too light".

"One of the things that influences incentives is the consequences and penalties that apply when something goes wrong," he said.

"Strong penalties can play an important role in incentivising good behaviour, and this is an area we should be looking at.

"But we do need to get the balance right as there can be unintended consequences."

While the RBA boss advanced the case for penalties to be increased for   misconduct, he indicated lawmakers should be careful to avoid stifling lending activity.

He warned that boosting penalties for breaching some laws ran the risk of  banks becoming afraid to lend.

"On conduct issues, we should set our expectations and standards high, and if they are not met the penalties should be firm," Lowe said.

"On lending, matters are more complex.

"Even when banks lend responsibly, a percentage of borrowers will end up in financial strife and be unable to meet their obligations.

"We need banks to be prepared to make loans in the full expectation that some borrowers will not be able to pay them back.

"Banks need to take risk and manage that risk well. If they become afraid to lend simply because of the consequences of making a loan that goes bad, our economy will suffer."

On the direction for monetary policy, Lowe reiterated the bank's position that there was a higher probability that the next move on the cash rate would be an increase.

However, he also noted that the RBA board did not see a strong case "for a near-term change in interest rates".

"There is a reasonable probability that the current setting of monetary policy will be maintained for a while yet," he said.

"This reflects the fact that the expected progress on our goals for unemployment and inflation is likely to be gradual."