Call to apply home loan rules only in Sydney, Melbourne

The major banks' main domestic rivals are calling for an overhaul of the prudential regulator's caps on property investor and interest-only mortgages, claiming the curbs are stifling competition.

Proposals from the second-tier lenders include clamping down on mortgages only in the hottest property markets such as Melbourne and Sydney, or putting tighter speed limits on the big four than the rest of the industry. APRA chair Wayne Byres told the AFR Banking & Wealth Summit it was critical to address the build-up of housing debt. For almost three years, banks have faced a 10 per cent annual growth cap in their housing investor loan portfolios, enforced by the Australian Prudential Regulation Authority (APRA). In March this year, APRA imposed a further restriction, capping interest-only lending at 30 per cent of new loans.

As big banks sell peripheral businesses to zero in on the housing market, regional banks say these "macroprudential" policies are having unhealthy side-effects for competition.

Banks including Suncorp, Bank of Queensland, and industry super-owned ME are calling on APRA to consider redesigning the rules, which they say are effectively locking in the big four banks' market share. "The macroprudential rules, while well-intentioned, have the effect of effectively maintaining status quo from a competition point of view," said Suncorp's chief executive of banking and wealth, David Carter. He acknowledged the policy was intended to prevent a "credit bubble" in real estate, but said the caps could be redesigned, such as only focusing on the cities at the greatest risk of overheating. "If we're really concerned about house prices getting away from everyone in Sydney and Melbourne, then maybe the focus point should be Sydney and Melbourne," Mr Carter said.

He noted the precedent in New Zealand, where regulators have targeted "macroprudential" policies at Auckland, where price growth had been most rapid. Bank of Queensland chief Jon Sutton said the caps could also be changed so some banks had higher speed limits than others ? which would allow smaller banks to increase their share.

"These changes basically just lock in the market share for everybody at the current level," Mr Sutton said. ME chief executive Jamie McPhee said the 30 per cent cap on interest-only lending also skewed how different banks could grow. Banks that were able to compete strongly in principal and interest lending were also given scope by the cap to pick up a strong share of interest-only lending, he said.

"It just makes it harder for challenger brands or smaller [authorised deposit-taking institutions] to get any shift in market share," he said. The regional banks called for the change in tack by APRA as part of a submission to the Productivity Commission's inquiry into competition in financial services.

Larger banks, however, have maintained in their submissions that the mortgage market remains highly competitive. Westpac said that in the four years to June, non-major banks had grown their lending at an average page of 9.5 per cent a year, faster than the 7.7 per cent average pace for the big four. Another key concern identified by the regional banks was the funding cost advantage that the big four receive from being considered "too big to fail", and the big banks' more favourable capital treatment. The big four are able to set aside less shareholder capital than the regional banks for every dollar lent, which makes the same loans more profitable for the big four. The smaller banks argue the government's bank levy helped to address the advantage the big four receive from an "implicit" guarantee by the taxpayer, but it has not gone far enough.

SMH/ September 25 2017