Last week’s comments from Wayne Byres about APRA being granted a new reserve power over shadow banks in the absence of any specifics has dismayed credit specialists.
They have also warned Canberra against needlessly upsetting non-bank lenders as well their funding source, the capital markets.
According to Stuart Fuller, Banking & Finance Partner at King & Wood Mallesons, the question for non-banks and their investors is what exactly is being proposed by the Federal Treasurer, Scott Morrison, with regards to these additional powers.
“Even if APRA is given the capacity to do something about threats to financial stability being caused outside the bank sector, what problem is it looking to solve and can APRA in fact solve that problem?” he asked.
The Federal Government could move to amend the Reserve Bank Act, which would allow APRA to regulate non-bank lenders. However, in the non-bank lending space ASIC already has significant regulatory powers.
If a bank breaches regulations, Fuller went on to say, APRA has a sanction – it can apply a different capital treatment to them or make them hold more capital against an asset. But he queried what APRA can do if non-bank lenders breach whatever limits or controls APRA might impose.
“To our mind, it doesn’t seem to make a whole lot of sense.”
What makes even less sense to the banking and finance specialist is the lack of detail forthcoming about the proposed new power.
“If you look at the budget papers, the Federal Treasurer paints with a very broad brush around giving APRA some powers to place macro prudential regulations on the non-bank sector including jurisdictional lending limits," he added.
Importantly, the lack of detail as to what regulatory framework will apply to the non-banks is worrisome for the industry, which is funded ultimately through the capital markets.
According to Fuller, the degree of uncertainty takes on a much greater importance since the debt markets are characterised by competition for capital and the need for investor certainty.
“Investor certainty and confidence is critical when it comes to the capital markets," he said. “They need to know what impact any new APRA power might have on the non-banks’ business before deciding to fund that business.
“So, if APRA is going to have reserve powers to impose restrictions on non-banks the legislation needs to be very specific about what those restrictions are and when they can be implemented, otherwise the risk is investors will lose confidence in the sector."
The upshot? That the Government and APRA must consult very quickly with the non-bank industry about the need for and design of these new regulations.
As Fuller sees it, ASIC already significantly regulates the non-banks through financial service licenses, credit licenses and responsible lending standards. Plus, the sector is closely scrutinised by warehouse financiers, bond holders and ratings agencies.
According to Fuller, the non-bank sector is efficient and effective in providing amounts of credit and types of products in competition with the banking sector.
And this is exactly the point. Why would government want to hurt competition?
And does APRA really want to play in the non-bank space or have these proposed powers been foisted on it by Morrison who is trying to solve the political conundrum of housing affordability?
According to Patrick Tuttle, the former chief of Pepper Group, Byres did not anticipate this authority - it came out of left field from Morrison - and constant talk of the hot housing market is clearly causing the Treasurer concern and he feels rightly or wrongly that this is could help.
“Since we don’t want a less efficient non-bank market, the measures Morrison is proposing are anti-competitive which is obviously contrary to what he has said publicly about fostering competition in banking," he said.
“Rather than supporting competition - which he publicly claims he does - his proposal will be detrimental as it will place a heavier burden on non-banks and potentially kill off innovation in product design.”