Giving additional powers to the Australian Prudential Regulation Authority to oversee the non-bank sector is an unusual step but is no cause for alarm just yet, argues CoreLogic.
In the May budget, the Federal Government announced that it would allocate $2.6 million over four years to allow APRA to exercise new powers in respect to the provision of credit by non-authorised deposit-taking institutions, also known as non-bank lenders.
The decision has drawn ire from parts of the industry including the legal profession, with one former non-bank industry executive implying that the move by Canberra risks killing a healthy and viable source of competition within the Australian home lending market.
Craig MacKenzie, CoreLogic's executive general manager of banking and finance, believes while the decision is “an unusual step”, the new powers could be a result of concerns about the effectiveness of the prudential regulator’s intervention in the mortgage market, including recent decisions to cap investment loans and curb interest-only loans.
“There is a view that APRA’s ever-increasing intervention in the mortgage market was at risk of becoming less effective on the broader lending environment where the non-ADI sector would effectively ‘take up the slack’ of the loans that the ADI sector was either unable or unwilling to write," he said.
A window into non-banks
MacKenzie added that It remained “unclear what these APRA powers will mean” for the non-bank lenders. But he argued that the first stage of its new powers will be more focused on data collection and understanding the nature and quality of lending that is happening outside of APRA’s direct level of supervision.
“Previously APRA has relied on the LMI (lenders mortgage insurance) sector and ADI’s wholesale funding activities to be their window into the non-ADI sector. This reporting obligation will now provide them with a direct line of sight," he told AB+F.
On the question of whether non-bank lenders in the mortgage sector could face further regulation, Mackenzie said this will not happen initially.
“Non-ADIs are likely to be subject to the same, or very similar, reporting standards as ADIs in the foreseeable future, although some non-ADIs may have operational challenges meeting these requirements.”
He also believes that any added supervision of non-ADIs won’t be a risk to the sector.
“I am sure APRA have heard this many times in the past associated with impending regulatory change. That’s not going to happen.”
Viable, robust market
MacKenzie's view is that APRA may initially perceive that the credit quality of loans written by non-ADIs is generally of a lower quality than that written by ADIs.
“If that is an accurate assessment, my sense is that APRA may look at the non-ADI sector with a view to curbing some of the ‘marginal lending’ that flows into the non-ADI sector," he said.
"That is, APRA may wish to seek to limit or control some of the lending that flows to the non-ADI sector predominantly because of the APRA controls on the ADI sector - for example high loan-to-value investment loans, interest only loans to owner occupiers.
"It will be interesting to observe how this plays out in the months and years ahead.”
For Mackenzie, non-bank lenders have adopted sensible lending practices and remains a viable and robust market.
“Like other ADIs, this sector is subject to the same level of investor scrutiny. In capital markets, you have to satisfy investors with the quality of the underlying loans you have written. Over the past 15 years, the non-bank sector has become much more sophisticated in identifying market opportunities and writing quality businesses.”