APRA Information Paper: balancing financial stability and competition

APRA has published an Information Paper “APRA’s objectives” which explains how its prudential objectives of the financial safety of institutions and the stability of the Australian financial system interact with supplementary considerations — efficiency, competition, contestability and competitive neutrality.

APRA Chair Wayne Byres recently stated in a speech:
” Stability will always remain APRA’s driving objective: we must stay true to our mandate to deliver a safe and stable financial system for the community.

We are, however, endeavouring to be more structured and systematic about the way we assess all of the components of our mandate – including competition – and be clearer in acknowledging the trade-offs being made. …the regulatory changes in the pipeline are designed to make sure that competition occurs from a position of financial strength.”

APRA’s Information Paper explains its proportionate approach to competition as follows:
“In establishing and implementing the prudential framework for regulated institutions, APRA takes the approach that the framework should allow for proportionate supervision, such that institutions are subject to expectations commensurate with the size, complexity, critical activities, substitutability, interconnectedness and resolvability of their business. This principle is important in assisting smaller institutions to compete without jeopardizing APRA’s prudential objectives. ”

Managing failures (resolvability)
On the issue of exits resulting from competition, the Information Paper states:

“APRA is not expected to operate a zero failure regime, and nor does it seek to prevent institutions with limited viability from exiting the market. Therefore, in the expectation that one or more financial institutions could no longer be viable and/or encounter severe stress, APRA undertakes contingency planning for how to manage the failure or near failure of a regulated institution. This includes requiring institutions to prepare their own recovery plans, developing and planning strategies through which APRA would use its powers in a crisis, and ensuring the Financial Claims Scheme can be properly administrated when activated. This work seeks to ensure that, to the extent possible, exits from the industry that would be expected to occur in a competitive market do so in an orderly fashion, without beneficiary loss or broader financial stability impacts.”

Nevertheless in his speech to mutuals, Byres acknowledged the domination of the 4 major banks:

“Any discussion on competition in the Australian banking system inevitably focuses on the market dominance of the four major Australian banks. Their sheer scale and brand recognition, coupled with significant customer inertia, is difficult for smaller banks to overcome. This is despite the fact that, in many cases, their product offerings are superior in pricing to the big four.”

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