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The APRA chair has said smaller banks have been able to gain market share despite increased regulations, but shareholders’ returns have been drained.
APRA chair Wayne Byres has considered a balance between maintaining financial stability and industry competition during an address at the Financial Review Banking Summit earlier this week.
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As Mr Byres explained, competition generates innovation and better outcomes for customers, while strong regulatory settings should deliver financially strong competitors – ensuring both financial stability and a dynamic marketplace.
But, competition is not always “unambiguously positive,” the APRA chair said.
“Our interventions in relation to housing lending over the latter part of the last decade had the explicit goal of dampening competitive spirits,” Mr Byres said.
“Those spirits were playing out in a manner – through poor lending standards – that was likely to be damaging to the community in the long run.
“So, broadly speaking, we are not tasked to promote competition, but we certainly try to support it unless it is materially threatening our stability mandate.”
As such, he noted concerns that increased regulation and compliance costs over the past decade may have favoured non-banks over banks, pushed larger banks ahead of their smaller rivals and made it harder for mutual banks to compete.
But Mr Byres has insisted that APRA’s data doesn’t back up those claims.
“The longer-term growth in the share of banking assets held by non-major banks – which was severely set back by GFC-related acquisitions and the associated flight to quality – has recommenced in recent years as smaller players again attract a larger share of new business,” he said.
The number of authorised deposit-taking institutions (ADIs) has steadily declined over time, dragged by a significant reduction in the number of mutuals – but the share of assets and mortgage lending held by the mutual sector had stayed steady.
Mr Byres said that “if anything”, assets and mortgage lending across the mutual banks has been inching higher in recent years.
“In other words, the trends in the mutual sector are reflective of that for the non-major bank sector more broadly,” he said.
Further, he noted that while APRA does not have a competition mandate, it has been conscious of the regulatory burden for smaller players, choosing to implement graduated approaches that avoid undue costs for smaller banks and making efforts to simplify regulations, to reduce costs.
However, increased regulation, particularly capital requirements, has eaten away at returns to shareholders.
“In setting higher capital requirements, our a priori assumption was that, in a competitive marketplace, banks would not be able to sustain their returns by passing the full impact of regulation onto their customers,” Mr Byres said.
“That has certainly been borne out, especially over the period since 2015 as the Basel III and ‘unquestionably strong’ reforms were built into the system.
“The industry’s RoE [return on equity] has therefore declined notably.”
Mr Byres also warned that banks will be sailing into risky territory in the years ahead, with rising possibilities of mortgage portfolio losses as rates rise, costs of living bite and house prices soften.
[Related: CBA flags importance of brokers in rising rate environment]
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