Always watching, watching watching, never doing:
At its meeting on 18 September 2019, the Council of Financial Regulators (the Council) discussed risks facing the Australian financial system, regulatory issues and developments relevant to its members. The main topics discussed included the following:
- Financing conditions and the housing market. Council members discussed credit conditions and recent developments in the housing market. Housing credit growth has been subdued, particularly growth in credit to investors. The major banks have seen slower growth relative to other lenders. Subdued credit growth has been primarily driven by weaker credit demand, though loan approvals have picked up recently. The potential for risks to financial stability from falling housing prices in Sydney and Melbourne has abated somewhat, with prices rising in the past few months. In contrast, prices have continued their prolonged decline in Western Australia and the Northern Territory and so the prevalence of negative equity for borrowers in those regions has continued to rise. The Council also discussed the continuing tight credit conditions for small businesses, with little growth in credit outstanding over the past year. The Council will continue to closely monitor developments.
- Members discussed progress with updating the guidance regarding responsible lending provisions in the National Consumer Credit Protection Act 2009. The updated guidance should provide greater clarity about what is required for a lender to comply with its obligations, taking into consideration enhancements to lending practices, the impact of competition from new market entrants, as well as enhanced access to and usage of consumer credit data and technological tools.
- Policy developments. APRA provided an update on a number of policy initiatives, including changes to the related entities framework for banks and other ADIs and proposals to strengthen remuneration requirements across all APRA-regulated entities. The proposed remuneration requirements seek to better align remuneration frameworks with the long-term interests of entities and their stakeholders, and incorporate a recommendation from the Royal Commission on limiting remuneration based on financial metrics. APRA briefed members on the outcomes of its capability review.
- Superannuation fund liquidity. The Council considered arrangements for managing liquidity at superannuation funds during periods of market stress. They noted that arrangements had operated as intended during the financial crisis and had since been strengthened. They agreed that existing arrangements provide an appropriate incentive for superannuation funds to manage their liquidity and that circumstances where a systemic liquidity problem could arise for the superannuation system were highly unlikely. Members concluded that no additional measures, including access to liquidity from the Reserve Bank, were warranted.
- Financial market infrastructure (FMI). Members discussed key elements of a package of proposed regulatory reforms for FMIs, including some changes to the supervisory framework and a resolution framework for clearing and settlement facilities. The reform package is expected to be released by the Council for consultation later in 2019. The package will seek to modernise and streamline regulators’ supervisory powers and provide new powers to resolve a distressed domestic clearing and settlement facility. Following the consultation, the Council will provide its findings to the Government to assist with policy design and the drafting of legislation.
- Stored-value payment facilities. The Council finalised a report to the Government proposing a revised regulatory framework for payment providers that hold stored value. The proposed framework seeks to reduce the complexity of existing regulation, while providing adequate protection for consumers and the flexibility to accommodate innovation. Both the Financial System Inquiry and the Productivity Commission’s inquiry into Competition in the Australian Financial System called for a review of the regulatory framework. The report will be provided to the Government in the near future.
- Banks’ offshore funding. The IMF’s recent Financial Sector Assessment Program (FSAP) review of the Australian financial system recommended that Australian regulators encourage a reduction of banks’ use of offshore funding and an extension of the maturity of their borrowings. Members noted that banks manage their risks from offshore borrowing through currency hedging and holding foreign currency liquid assets, and that there are various other factors mitigating the risks. They welcomed the progress that the banks had made in lengthening the maturity of their offshore term debt over recent years. A further lengthening of the maturity of their offshore borrowing would reduce the rollover risk for banks and the broader financial system.
- Stablecoins. The Council considered some potential policy implications of so-called ‘stablecoins’ and associated payment services, particularly those linked to large, established networks. A stablecoin is a crypto-asset designed to maintain a stable value relative to another asset, typically a unit of currency or a commodity. Members concluded that elements of the existing regulatory framework, along with the framework proposed for stored-value facilities, were likely to apply to products of this type, but that Australian regulators would need to consider any international regulatory frameworks that might ultimately be established. Council agencies and a number of other Australian regulators are collaborating on their analysis of stablecoins. They are also drawing on their membership of several international groups focused on similar issues. Council members stressed the benefits of having a flexible, technology-neutral regulatory regime in dealing with these and other innovations.
- Cyber security and crisis management. The Council reviewed work under way and planned by working groups focused on cyber security and crisis management. One focus of cyber security work in the period ahead will be aligning financial sector efforts with broader initiatives, including those of the Australian Cyber Security Centre and the Government’s 2020 Cyber Security Strategy. Recent work on crisis management in the banking sector has included a joint crisis simulation with New Zealand regulators, focussed on the testing of communications, under the auspices of the Trans-Tasman Council on Banking Supervision.
APRA has clearly over-done its loosening of macroprudential and lending buffers and needs to tighten as the RBA cuts.
