First do no harm: Byres balances banks

The arrival of the fintech train and the very public questioning of Australia's financial institutions are creating a perfect storm for the country’s regulators, with Wayne Byres, chairman of the Australian Prudential Regulation Authority (APRA) telling ASIC’s 2017 forum, “it’s a complex balancing act”.

Byres described the regulator as walking a tightrope across a financial system undergoing change at pace, one “bookended by safety and stability” - but there are many other factors at play.

“While safety is our primary objective, parliament has been very clear that we are not to pursue safety-at-all-costs," he said.

"We have a mandate that asks us to think about safety but balance it with considerations of competition and contestability, competitive neutrality and efficiency - to balance all those things and do so in a way that promotes financial stability.

"It's a complex balancing act to get the regulatory settings right, that achieve the safety the community is looking for, but at the same time facilitate competition within it."
 

Sustainable competition

Byres said there were instances when the regulator "intervenes to dampen competitive instincts", but this should not be seen as a compromise of values or mission.

“The discussion that’s all through the papers on housing is a classic example. We are trying to dampen some of the competitive enthusiasm amongst housing lenders, we make no apologies for that, by all means lenders can compete on price, on service standards and products - but competing on underwriting standards is not actually in the interests of either lenders or borrowers," he said.

Which leads to the crux of APRA’s day-to-day purpose – is Australia’s financial system regulator therefore skewered in a trade-off between stability and competition?

“I don’t hold that to be the case and APRA doesn’t hold that to be the case, what we’re really after is sustainable competition. That means financially strong competitors who will be there through good times and bad, through the entire financial cycle," he explained.
 

Good times business model

According to Byres, one of the lessons from the financial crisis was the deleterious impact on the financial system of entrants with a “good times business model” – those that proved competitive when times were good, but when times were averse their business model didn’t work.

The result, he said, was more undirected concentration in the financial system that "will take many years to unwind".

”Our starting proposition when it comes to competition is do no harm. Achieve prudential outcomes, without hindering competition in anyway."

Byres said the lesson here is that “competition is not an end in itself, it’s a way of delivering benefit to the community”.

"If you think about the financial system some of the big competitive shifts are coming from new entrants, sometimes people outside the regtulated sector have an impact – the case study is Aussie Home loans which changed the value the community got from mortgages," he said, adding that ING has emerged as a low cost, simple value competitor that is now the sixth or seventh biggest bank in the country.

"Facilitating these new entrants to disrupt is important. The challenge is to get the balance right," he said. "We allow people into the financial system, we're allowing them to get hold of the money of my mother and your family members ... my sense of the Australian community is they’re very keen, they have an appetite for new technology and new services, but no appetite for risk.

"So we have to strike a balance without putting uninformed investors in particular at risk."

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