Wayne Byres, in a speech yesterday, returned to a question that has been a constant throughout his term as chair of the Australian Prudential Regulation Authority – whether prudential regulation of Australia’s banking system achieves the right balance between financial system stability and competition.

In somewhat contradictory remarks, he said strong regulation and competition are not incompatible but in situations where APRA’s regulation has stifled competition, that’s OK.

Byres has served as APRA chair since 2014 and retires next week. He gave the speech at a Finsia lunch in Sydney to reflect on his term.

When Byres took up the role, the David Murray-chaired Financial System Inquiry was underway. The Australian Banking Association summed up the view of its members that there was an over-emphasis on stability in a submission that said: “While a strong regulatory framework brings benefits, regulation of the Australian banking system also comes at a cost.

"These costs are both direct, such as compliance and reporting costs, and indirect, such as the opportunity cost to the economy from impeding new entrants. Now is the right time to consider the balance being struck between stability, growth and innovation, for the prosperity of the wider economy and the benefit of customers. Not every measure designed to improve stability should be implemented."

Or, as Monash University's Rod Maddock put it: "Most decisions taken by APRA for prudential reasons have a wide range of other consequences. It is not clear that APRA does, or is able to, make appropriate trade-offs."

Back then, APRA defended its approach by pointing out that in 1997 the ratio of financial institution assets to GDP was 200 per cent and by 2013 this ratio had increased to 350 per cent; and between 2003 and 2013 APRA granted 72 new licences, many to foreign financial institutions.

And in a speech at the time, Reserve Bank governor Glenn Stevens took issue with the idea that a lighter regulatory burden would assist economic growth. Stevens said: "Did the highly leveraged expansion of some parts of the financial sector in the period prior to the financial crisis really add much, sustainable, to growth? It is far from obvious that it did.”

The issue returned several years later, when the Australian Competition and Consumer Commission and the Productivity Commission reviewed the outcomes of APRA’s macroprudential policy measures.

Starting in 2014, at various times APRA directed banks to cap the level of interest-only mortgage lending in their portfolios, limit the rate of growth in investor mortgage lending, and lift serviceability buffers and interest rate floors.

APRA’s own assessment of these measures was that lending standards improved. The growth in credit for housing remained stable but the composition changed considerably: the rate of growth in lending to investors fell and the proportion of interest-only loans halved. Lending on high LVRs also moderated.

The ACCC’s view, in a report on home loan pricing in 2018, was that the interest-only cap had the effect of lessening competition and led to “synchronised” rate increases.

The Productivity Commission came to a similar conclusion. In its 2018 report, Competition