Tasked with maintaining the stability of banking and superannuation, the Australian Prudential Regulation Authority has failed, leading to a dangerously unstable situation in the house market, even putting banking itself at risk, writes bank customer advocate Roger Brown.
APRA was established in 1998. The first mistake it made was turning a blind eye to reckless bank lending on mortgages in the early 2000s, allowing rampant interest-only lending for home purchases. This had the effect of doubling the price of houses within a few short years. Put simply, a person could take on a debt under interest-only payments, twice that if principal and interest terms applied. The banks pursued this marketing strategy with enthusiasm.
Interest-only mortgage loans greatly boosted the profits of banks and made them arguably the most profitable in the world. The result of this orgy of loose lending practices is that the average house price has increased by around four times since 2000. It should have little more than doubled, based on 70 years of data. Consequently, an entire generation of Australians has either been excluded from owning a home, or taken on unsustainable mortgages.
APRA has never recognised the dangers to both banks and their customers, as well as the financial system, in allowing this reckless lending to flourish. Instead, its main objective was to boost housing prices. This was designed to give the impression that citizens were becoming wealthy, and as a consequence the federal government felt a level of security with voters. APRA did not act without fear or favour in carrying out its duties and responsibilities.
The mortgage trap
The second mistake made by APRA is that it has rarely intervened of its own accord and instructed banks to desist from certain lending activities, or to amend their modus operandi. For example, the recommendation of Commissioner Hayne in the royal commission of 2019 that mortgage brokers be barred from arranging mortgages, was not enforced by APRA. Instead it stood by meekly with no comment as the government of the day publicly dismissed the recommendation of the royal commission. This was a grave dereliction of duty.
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A further example of the failure of APRA to carry out its responsibilities was the inability to act in its own right. For example, in 2014 it took the federal treasurer to intervene and instruct the banks, either directly or indirectly through APRA, to significantly reduce interest-only mortgages as the practice was severely distorting the price of residential property. This instruction was duly adopted by the banks with immediate effect.
Around three years after that intervention by the treasurer, a further instruction was given to the effect that the banks must ease their lending standards as house prices were falling. In effect, APRA was doing the bidding of the federal government instead of taking the initiative in instructing banks. It ignored its overall responsibilities under the APRA Act, which includes being a proactive regulator.
Neglecting its responsibilities
APRA has abrogated the responsibilities it has to act without fear or favour in safeguarding the financial system, and consumers in general. It has recruited staff primarily from the banking and financial sector rather than from the broad spectrum of society. This leaves them prone to a blinkered view of banking and a tendency to be too close to government as well as the banking industry. It is well known that the three parties mix socially, which is not conducive to independence and enforcement.
In summary, the tangible benefits of having APRA responsible for the stability of the financial system is questionable at best, and a total failure at worst. This is because the housing market and the financial wellbeing of citizens is now at real risk of collapse. Twenty-four years of activity by APRA has not prevented this dire position from becoming reality.
Established on the basis of recommendations of the Wallis Inquiry into the Australian Financial System in 1998, APRA is tasked with:
…protecting the interests of depositors, policyholders and superannuation fund members.
However, in its recently released Corporate Plan, APRA makes it clear what it sees as its real purpose:
- preserving the financial and operational resilience of Australia’s banks, insurers and superannuation funds;
- building on momentum to modernise the prudential architecture to ensure it remains fit for purpose both now and in the future; and
- better enabling data-driven decision-making by APRA’s stakeholders.
Nary a mention of those pesky depositors, policyholders or superannuation fund members there …
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Roger Brown is a banking customer advocate with a direct interest in the Australian mortgage market through assessing the problems being brought about by the constant reductions of interest rates and the consequence house price bubble that would eventuate. I have been a constant critic of APRA and their ineffective responses to the problems within the mortgage industry. He has previously worked in insurance world-wide, and been an adviser to the Victorian Government in relation to private workers compensations schemes.