APRA controls on non-banks could trigger ‘credit crunch’

On budget night, the Treasurer announced that the government would provide APRA with $2.6 million over four years from 2017-18 to allow the regulator to exercise new powers over the provision of credit by lenders that are outside the traditional banking sector.

While the announcement was largely overshadowed by the bank levy and other headline-grabbing budget measures, Pepper’s former co-CEO Patrick Tuttle has this week questioned what these “new powers over the provision of credit” are and why they are necessary.

“What problem is the government seeking to fix? Fair enough that APRA has implemented macroprudential controls to limit the overall proportion of ADI lending directed towards investment property loans and interest-only loans. This has eased some excessive lending volumes in these loan products across the broader market, particularly within the major banks,” Mr Tuttle said.

“That said, is the government, through the auspices of APRA, now seeking to effectively dictate consumer credit and lending policies and practices for all non-bank financial institutions in Australia? If so, when was this objective ever stipulated in APRA’s mandate? Isn’t ASIC responsible for overseeing Australia’s non-bank financial institutions, their compliance with responsible lending practices, and their adherence to the consumer credit code?”

Mr Tuttle believes the potential unintended consequences of APRA’s intervention of the non-bank lenders is a cause for concern. It could result in APRA imposing excessive controls, which he fears would impede the functioning of Australia's non-bank sector. 

“It will also potentially create regulatory chaos between APRA and ASIC.”

Australia’s non-bank lenders were hit hard by the GFC and have since consolidated. Today they represent less than 10 per cent of total mortgage lending. Non-banks are almost exclusively funded via the wholesale debt capital markets and rely on the issuance of residential mortgage backed securities (RMBS).

Mr Tuttle explained that sophisticated investors effectively regulate the types of mortgages underwritten by Australia’s non-bank lenders by requiring them to only issue securities backed by high quality mortgage pools that do not have excessive concentrations of loans by geographic region or product type, such as investment loans, interest-only loans, high LVR loans, or loans to consumers in low socio-economic regions.

“By seeking to excessively regulate the non-bank sector which is already subject to comprehensive regulation by ASIC, there is a real risk that the supply of credit to legitimate borrowers for legitimate purposes will dry up altogether, depriving consumers of genuine choice, and inadvertently accelerating a credit crunch and a sharper than anticipated correction in house prices,” he said.

“At no stage have the key stakeholders within the non-bank sector been consulted by the Treasurer, or any government department for that matter, to discuss the potential benefits or ramifications of their proposed (and yet to be clarified) changes.”

Mr Tuttle, who stepped down from his role as Pepper’s co-group chief executive earlier this month, fears that Australia is “effectively talking itself into a housing and credit downturn” that could be “far more dramatic and consequential than it might otherwise need to be”.

[Related: Non-banks 'shouldn't be wary' of APRA's new powers]