Quarterly Statement by the Council of Financial Regulators – March 2019
At its meeting on 15 March 2019, the Council of Financial Regulators (the Council) discussed systemic risks facing the Australian financial system, regulatory issues and developments relevant to its members. The main topics discussed included the following:
Financing conditions and the housing market. The Council discussed the
slowdown in housing credit growth and the weaker conditions in the housing market.
Members agreed the evidence from data and consultations with banks indicated that the
slowing in credit largely reflects weaker demand, particularly from investors. There
has also been some tightening of credit supply over the past year as lenders have
applied their lending policies more stringently and undertaken more detailed scrutiny
of borrowers’ expenses and other liabilities. There remains strong competition for
borrowers of low credit risk.
Housing markets remain weak, particularly in Melbourne, Sydney and Perth. However to date the adjustment in housing prices and activity has been orderly and does not raise material financial stability concerns. Housing prices nationally have fallen by 6½ per cent over the past year, but this has followed a period of large price gains in some areas. Further, the improvement in banks’ lending standards – including a lower share of high loan-to-valuation ratio lending – means that households and lenders generally are less vulnerable to falling housing prices than in the past. Despite historically high household debt, signs of financial stress remain relatively contained given a strong labour market and low interest rates. The Council noted that while mortgage arrears rates remain low, they have reached a post-financial crisis high. This largely reflects regional conditions. Overall, the future paths of housing activity and prices remain uncertain. The Council agencies will be closely monitoring the extent of any further adjustments, and in particular the ongoing availability of credit.
Small business lending. Members observed that new lending to small
businesses has slowed over the past year. For many small businesses, personal and
business finances are intermingled. As a consequence, the higher standards that
lenders apply to personal borrowing are affecting some small business loan applications.
Further falls in housing prices could constrain small business borrowing, given that
around half of loans to unincorporated businesses are secured by residential property.
The Council will continue to monitor developments closely and stressed the importance
of lenders supplying credit to small and medium-sized businesses.
Members discussed the definition of small business in the Banking Code of Practice (the Code). They noted that the changes to the Code already due to commence on 1 July 2019 are significant. Further, the effects of these changes and any response to them by lenders, including small to medium-sized lenders, is still to be gauged. In light of this and the tightening in credit conditions that has taken place, members supported maintaining the current borrowing threshold to define small businesses within the Code, with an independent review to be undertaken within 18 months of the Code’s commencement. This would allow time for sufficient information to be gathered on the effects of the initial changes and the potential effects of the changes in the small business definition recommended by the Royal Commission. At that point it would be appropriate to consider whether to increase the limit from $3 million to $5 million for all banks. Members expressed a view that a limit based on total credit exposures is more appropriate than one based on loan size. Council members noted that other Royal Commission recommendations relevant to the Banking Code are expected to be implemented in the near term.
Final Report of the Royal Commission. Members discussed the implementation of the recommendations of the Royal
Commission. This included the matters on which the Government is taking early
action and the broader planning to allow the full agenda to be implemented in a
timely and efficient manner. It was noted that an Implementation Steering
Committee is being established and will meet shortly. It will be composed of
senior representatives from Treasury, APRA, ASIC, the Office of Parliamentary
Counsel and other agencies as required.
Following a request by the Government, the Council and the Australian Competition and Consumer Commission will consider the commission structure for mortgage brokers in three years’ time, including the effects of changes already announced.
- Prudential policy development in Australia and New Zealand. APRA provided an update on its consultation on increasing the loss-absorbing capacity of authorised deposit-taking institutions (ADIs) to support orderly resolution. Members reiterated their in-principle support for a framework that is not overly complex. Members also discussed the Reserve Bank of New Zealand’s recent proposal to significantly increase Tier 1 capital ratios for banks operating in New Zealand, including the implications for the Australian parent banks.
The Council also discussed the activities of some of its sub-groups:
- Financial Market Infrastructure (FMI) Steering Committee (the Committee). The Committee provided an update on its recent work, which has included further consideration of the design of the proposed FMI resolution regime for Australia. A further round of public consultation is likely in mid-2019. The Committee has also been working with Treasury on legislative changes that would support both the Council’s policy framework for competition in the clearing and settlement of Australian cash equities and the application of the Council’s Regulatory Expectations for Conduct in Operating Cash Equity Clearing and Settlement Services in Australia to ASX’s CHESS replacement project.
- Cyber security. The Council approved new terms of reference and a work plan for its Cyber Security Working Group. The Working Group helps to coordinate cyber-related work programs among Council member agencies. Member agencies have been considering measures to increase the resilience of the financial sector to a material cyber incident, including by issuing new standards and guidance.
Council of Financial Regulators
The Council of Financial Regulators (the Council) is the coordinating body for Australia's main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council's objectives are to contribute to the efficiency and effectiveness of financial regulation, and to promote stability of the Australian financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.