The
unacceptable stories we've heard at the banking royal commission have
raised important questions about whether the banks are lending to borrowers
who can actually afford to pay, and if financial institutions are selling
customers products they do not need.
But there is a mood within the community – and even at the royal commission
– that financial institutions should be wholly responsible for customers'
actions. And when customers invest in a product that goes bad, there is a
growing expectation that regulators should be there to bail them out.
Byres dispelled this idea on Wednesday. "It is important that the concept of
caveat emptor remains in the system," he said. (Caveat emptor is Latin for
"let the buyer beware").
Wayne Byers: "Regulators cannot be everywhere overseeing everything.
It is important the community understands that."
Unrealistic expectations
He said consumers want all the benefits of a "dynamic, innovative financial
sector … but no one has any appetite to lose a cent."
Byres said he had spoken with the chairman of the
Australian Securities and Investment Commission, James Shipton, about
how to re-educate the community on the idea of buyer beware, and reminded
the market that APRA's pact with the government specifically does not assume
it will deliver a system that has zero risk of failures.
"[But] I am not sure that broader community really buys in on that," he
said.
Commissioner Kenneth Hayne faces a delicate balancing act when it
comes to making recommendations for the sector.
The remarks highlight the delicate balancing act that Commissioner
Kenneth Hayne will face when making recommendations to the government.
What regulatory settings will better protect consumers, but ensure that
financial institutions keep making loans and providing products? And how do
you price risk if the consumer believes they never really deserve to be left
worse off when things go wrong?
Byres is realistic about the shift in societal expectations. But he is also
right to question whether this has gone too far.
Withstanding a crisis
Wayne Byers says lending standards have improved markedly, and
APRA's macro prudential measures appear to have worked.
Meanwhile, the bulk of the chairman's prepared remarks were enough to make
Chanticleer wonder if this is what it sounds like when the ever-humble and
measured Byres does a spot of bragging.
In a speech given 10 days after APRA marked its 20th birthday, he gave the
banking system a pretty glowing health check. He argued the regulator had
effectively made hay while the economic sun had shone, forcing the banks to
beef up their capital levels and tighten lending standards so the system
will withstand the next crisis.
Secondly, the banks have passed the regulator's latest stress tests.
The tests required the banks to consider a significant downturn in the
housing market (prices down 35 per cent) triggered by a collapse in demand
for commodities and a downturn in China, an unemployment rate of 11 per
cent, and the impacts of mis-sold loans.
Wayne Byres provided the usual caveats about the difference between
stress tests and reality and also gave banks a clip about their plans for
recovering from a big crisis.
Overall, the banks projected credit losses of about $40 billion in the
residential books, which Byres said would be "broadly consistent with the
experience in the UK in the early 1990s, but lower than the losses seen in
Ireland or the US during the global financial crisis".
Fundamentals still strong
Happily, the losses were also lower than under the last stress test, from
2014. When you add in the recovery processes the banks would put in place –
such as raising capital and cutting costs – the numbers look even better.
Byres provided the usual caveats about the difference between stress tests
and reality and also gave banks a clip about their plans for recovering from
a big crisis; these plans are improving, but there is more work to be done.
Byres has not necessarily told investors anything they didn't know – I doubt
any bank shareholder would expect a set of economic circumstances like that
envisaged in the stress tests, and most would expect APRA had done its job
to ensure the system was resilient if those circumstances did happen.
But Byres set out to reinforce the fact that for all the bad news you've
heard about the banks this year, APRA has used Australia's comparatively
strong economic environment to improve the strength and resilience of the
system.
It might be hard to be bullish about banks given the outlook for credit
growth, the state of the housing market and the potential for the royal
commission to introduce a fresh set of regulatory burdens. But at least the
fundamentals of this crucial sector appear to be as strong as they can be.
