Boxing at Shadows? APRA's proposed powers to regulate (and collect more information on) lending activities of Non-ADIs

19 Jul 2017

Banking Regulatory Update

On Monday 17 July 2017, the Commonwealth government released "The Treasury Laws Amendment (Non-ADI Lender Rules) Bill 2017" for an act to amend the law in relation to non-ADI lenders, together with an explanatory memorandum.

The bill was flagged in the Federal Budget in May 2017 where it was announced that the government would provide additional funding to APRA to exercise new powers in respect of the provision of credit by non-ADI lenders and to assist in the collection of data from these entities for monitoring of their activities in the lending markets.(1)

The purpose of the bill is "to promote financial stability through strengthening APRA's ability to respond to developments in non-ADI lending that pose a risk to financial stability" (2) and it has some important implications for shadow banking lenders, in terms of bringing them within the reach of Australia's regulators.

Proposed Regulatory Changes

Broadly, the bill proposes the following changes.

  1. Amendments to the Banking Act 1959 (Cth), providing:
    • APRA with power to make rules concerning lending activities of non-ADI lenders which materially contribute to risks of instability in the Australian financial system;
    • APRA with new powers to issue directions to non-ADI lenders (including to refrain from lending or activities connected with funding or originating loans) for failure to comply with rules it has imposed; and
    • penalties for non-ADI lenders failing to comply with any direction made by APRA; and
  2. Amendments to the Financial Sector (Collection of Data) Act 2001 (Cth) which result in a broader class of non-ADI lenders being captured under the definition of registrable corporations (albeit, excluding any corporation whose: (a) sum of assets in Australia does not exceed $50,000,000; and (b) sum of the values of principal amounts outstanding on loans or other financing, entered into in a financial year, does not exceed $50,000,000), improving APRA's ability to collect data from those lenders for the purposes of properly monitoring financial stability implications. Specifically, the amended definition of non-ADI lender seeks to capture entities who engage in material lending activity, irrespective of whether it is their primary business.

The impact of the bill will extend to lenders in the shadow banking market – basically those non-ADI lenders which have found their niche in filling the funding gaps where ADIs have been either unable or unwilling to invest.(3)

APRA: Providing Prudential Regulation and Supervision

Under the Banking Act 1959 (Cth), a body corporate may only carry on banking business in Australia if it has been so authorised by APRA. Banking business includes both the provision of finance and, importantly, deposit taking. A corporate that is authorised to carry out banking business by APRA is known as an "Authorised Deposit-taking Institution or ADI", whereas those which do not take deposits are "Non Authorised Deposit-taking Institutions or non- ADIs".

Authorised ADIs are subject to APRA's prudential requirements and ongoing supervision, whereas non-ADIs are not (which is not to say that they are unregulated, as ASIC also provide a further layer of regulation for those providing financial and other credit related services).

So why is APRA Boxing at Shadows? Australia's Financial Stability

With the financial stability of Australia's banking market at stake, it seems there are at least two strong arguments being relied on for the proposed increases to APRA's powers:

  • First, as we saw in the GFC, finance from the shadow banking sector is not without its risk to financial stability. Indeed, "a key lesson from the crisis for regulators globally was that distress in the shadow banking system may be transmitted throughout the broader domestic and international financial system via direct and indirect linkages" (4); and
  • Second, while it is broadly accepted that Australia's shadow banking sector is small on a relative scale (internationally), it is growing and it does have a cyclical component to it (swelling in times of economic distress). In order to keep pace with the growth and developments in the shadow banking sector and understanding how to best monitor, regulate and contain its effect on financial stability, APRA need more and better information on it.

The Future

The challenge now for the parliament in deciding on this bill, is to ensure that non-ADI lenders are subject to appropriate oversight and regulation to address bank like risks to financial stability, while not inhibiting sustainable non-ADI financing activity that does not pose such risks (5). The focus will very much need to be on the materiality of such risk on the financial markets.

Endnotes

  1. MacKenzie, C., Why is APRA looking to regulate non-banks?, 13 June 2017, http://www.Linkedin.com.au

  2. The Treasury Laws Amendment (Non-ADI Lender Rules) Bill 2017, Exposure Draft Explanatory Materials, p.3

  3. Cranston, M., Alceon welcomes move on shadow bank sector, 18 July 2017, Australian Financial Review

  4. Manalo, J., McLoughlin, K. and Schwartz, C. "Shadow Banking – International and Domestic Developments" (March Quarter 2015), Bulletin, Reserve Bank of Australia

  5. As above

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