The House Committee on Economics announced it would 'scrutinise the Australian Prudential Regulation Authority' (APRA), as part of its review of the performance and strengths of Australia’s financial and banking regulator earlier in the week.  Ahead of the hearing, David Coleman MP, The Chair of the Committee, stated 'the hearing will enable the Committee to scrutinise APRA on its performance and operation, including the adoption of "unquestionably strong" capital benchmarks for the four major banks, and further measures to reinforce sound residential mortgage lending practices.  The Committee is also likely to scrutinise APRA on other activities relating to the banking sector, including its inquiry into governance and culture at the Commonwealth Bank.'

[Source: House of Representatives Media Release: APRA to face parliamentary scrutiny 12/09/2017; Review of the Australian Prudential Regulation Authority Annual Report 2016]

APRA Chairman Wayne Byres' opening statement before the Committee

APRA has released APRA Chairman Wayne Byres' opening statement before the House of Representatives Standing Committee on Economics: Review of APRA's 2015/2016 Annual Report, given on 13 September. 

Key Points

• Mr Byres stated that though the 2015/2016 annual report was published some time ago, many of the issues discussed in it remain relevant, including the risks identified in the housing market, the funding profile of the banking system, poor experience in the insurance industry and transparency in the superannuation industry.

• Comments on Authorised Deposit Institution licensing regime: Mr Byres updated the Committee on APRA’s response to the Committee's Review of the Four Major Banks and outlined the actions APRA has taken on the Committee's recommendation for a review of the licensing requirements for Authorised Deposit-taking Institutions (ADIs).  These included the commencement of an internal restructure that included the creation of a centralized unit tasked with overseeing APRA's licensing activities and the release of a discussion paper on proposed revisions to the licensing framework for ADIs.

• Banking Executive Accountability Regime: Mr Byres noted a number of other Committee recommendations designed to strengthen accountability and transparency within financial institutions and the actions taken by government in responding to them through the introduction of the Banking Executive Accountability Regime (BEAR).  He said that 'As a package, this is not new territory for APRA. The core objective of the BEAR – establishing clearer accountabilities for, and expected standards of behaviour by, senior executives within banks – is being constructed in a manner that is consistent with APRA’s prudential mandate. While there are a range of new elements in the proposed reforms, the BEAR should essentially be seen as a strengthening of the existing prudential framework. Indeed, once the new framework is put in place for banks, APRA will consider whether some of the concepts within the regime have wider application. To the extent that they can add to community trust and confidence that all prudentially-regulated institutions are well-governed and prudently managed, then they might have significant benefit more broadly'.

• Inquiry into the Commonwealth Bank of Australia: Mr Byres noted that the issue 'of community trust and confidence was an important consideration behind our recent decision to establish a Prudential Inquiry into the Commonwealth Bank of Australia (CBA)'.   Mr Byres added that 'Our Inquiry provides the opportunity for the CBA to demonstrate that it has and will take these issues seriously, and is responding to them. Where action is not deemed sufficient, the Inquiry will make clear recommendations for the CBA to implement. Our decision to make the Inquiry reports public provides an opportunity for the broader community to understand what common themes may have been behind these incidents, and provide assurance that they have been identified and will be addressed. In that sense, we very much see the Inquiry as making a constructive contribution to strengthening the reputation and public standing of the bank. As an added benefit, any issues identified will provide useful learnings to others in the industry'.

 [Source: APRA Speeches Opening Statement Wayne Byres 13/09/2017]

APRA Chairman's reported responses to Committee questions

The Australian writes that Mr Byres has told the Committee that:

• APRA was aware of the AUSTRAC investigation: APRA was aware that AUSTRAC was not 'entirely happy' with the Commonwealth Bank of Australia's (CBA's) response to allegations of money laundering linked to its intelligent deposit machines.  Reportedly, the specific details of the AUSTRAC allegations were not known to APRA before the morning they were filed in the Federal court, but APRA knew of the investigation into the CBA.  Mr Byres is quoted as stating: 'We were aware that they [AUSTRAC] were looking at issues like the ATM machines and the limits as part of the investigative work they were doing across a range of organisations…We were aware they hadn’t been entirely happy with CBA’s response to their issues. They sought information from us about some work we’d done more broadly within CBA'.

• APRA's assessment is that the CBA remains financially stable in the wake of the allegations:  The article quotes Mr Byres as commenting: 'Our assessment at this point — and we monitor their liquidity, we monitor their deposit outflows, we have monitored a range of things since this issue came to light — is that it’s had a negligible impact in terms of loss of deposits or loss of customers in the way that would make a material difference to the stability of the bank'.

• The APRA inquiry is necessary to restore public trust in the CBA: Mr Byres reportedly said the APRA inquiry was necessary since any independent inquiry launched by the bank would fail to restore public confidence in the lender.  The article quotes Mr Byres as stating: 'It’s very difficult for the Commonwealth Bank, given where it finds itself, to say to the community: ‘Don’t worry, we will look after these things… We are aware there are a range of initiatives under way at the bank to address the issues that have been identified. But it was difficult to see how that was actually going to generate an improvement in public understanding and public acceptance and allow the bank to restore its reputation in any short time period.'

• The Commonwealth Bank of Australia has proposed a number of initiatives: According to the article, Mr Byres said that the CBA had proposed a number of initiatives to address issued at the CBA but that APRA reportedly does not 'believe it has a full understanding of the nature of the problems facing the bank'.    

[Source: [registration required] The Australian 14/09/2017]

Treasurer Scott Morrison reportedly supportive of APRA's performance in overseeing mortgage lending practices

The ABC writes that UBS investment bank has conducted a survey of 900 people who took out a home loan in 2017 and has found that only 67% responded that their mortgage was 'completely factual and accurate' down from 72% of 2016 borrowers and 8% admitting that their information was only 'partially factual and accurate'.  According to the ABC article, UBS has estimated that around $500 Billion worth of outstanding home loans contain misstatements about incomes, assets, existing debts and/or expenses.

SBS writes that Treasurer Scott Morrison is confident the Australian Prudential Regulatory Authority is doing an effective job of overseeing bank's credit testing and has commented in relation to the UBS report: 'There's this report, yep, but APRA's the one that will keep monitoring those issues and ensuring the banks aren't getting themselves in a sticky spot' Mr Morrison reportedly said.

[Sources:  ABC 11/09/2017; SBS 12/09/2017]