The Australian Prudential Regulator Authority (APRA), was established on July 1998, is an integrated prudential regulator of the Financial

System in Australia. It oversees DepositTaking Institutions (banks, credit unions, building societies) as well as friendly societies, life and general insurance and superannuation. The role of APRA is to develop and to enforce a robust prudential framework of legislation, prudential standards and prudential guidance that promotes prudential behaviour by Authorised Deposit-Taking Institutions (ADIs), Insurance companies, superannuation funds and other financial institutions it supervise, with the key aim of protecting the interests of theirs depositors, policy holders and members of superannuation funds.

The Banking Act 1959 gives APRA power to authorise and revoke authorities of ADIs, insurance companies and superannuation funds, to make prudential standards or issue enforceable directions, and to inspect those mentioned financial services providers above. The legislation provides APRA with the power to act in the interest of depositors, including the power to appoint the statutory manager to take control of any ADIs in difficulty, as well as the power to appoint of a judicial manager for trouble insurance companies. In addition, the legislation also enhances APRA to remove or appoint of trustees covering troubled superannuation funds. According to the two articles provided in Webct, APRA has put bank boards on notice over mortgage lending standards amid signs competition for market share is driving increasingly risky practices1 by sending a letter the chairman of the approved ADIs. In the letter, APRA also calls for halt to riskier lending2. The nature of APRAs concern come from the back ground that the banks in Australia recently increase their competitive in home loan lending, which is now become a larger proportion of the countrys banking system with nearly 60% of their total lending is directed toward housing3, in the more riskier way. That means the banks, in order to gain more share in the mortgage lending market, have loosen their borrowing requirements by rising the loan-to-valuation ratios to 95 per cent instead of 90 per cent during the year 2008 and 2009. Since nearly 60% of their total lending is directed toward housing, they are heavily reliant on issuing ever-increasing loan volumes in order to sustain profit growth. At the same time, the security over the banks assets (loans) depends heavily
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Article, APRA warns banks over home loan, The Australian Financial Review, 2/8/11. Article, APRA calls halt to riskier lending, The Australian Financial Review, 2/8/11. 3 http://www.australianbankingfinance.com

on the value of the underlying homes on which they have lent. In another words, if Australian households reduce their borrowings, bank profits fall. As such, they are increasingly willing to relax lending standards and offer mortgages to higher risk borrowers in order to sustain both (short-term) profitability and Australias over-inflated housing values. This in the other hand will increase the chance of default in home loan repayment and therefore increase housing arrear. It seems that APRA feels that this high loan-to-valuation ratio and high expose the borrower as well as the lender and are slowly bringing Australia back to where we were pre global financial crisis. By sending out the warning letter to the banks chairmen, APRA has cautioned all lenders against relaxing their lending criteria and affordability calculations when it comes to home loan lending, as well as the powerful message weve happy if youre happy4. Clearly, APRA have signaled that they will not tolerate a return by the banks to pre-Global Financial Crisis (GFC) levels of mortgage lending. If the banks chosen to continue this risky practice and ignore the warning, APRA might exercise its given power to prevent another GFC and to protect the interest of the depositors. In addition, Australian Securities and Investments Commission (ASIC), which is not mentioned in the articles, also play an important role in regulating banking sector and maintain the performance of the banking system. ASIC is another Australias corporate, markets and financial services regulator has the power under Australian Securities and Investments Commission Act 2001 as well as the National Consumer Credit Protection Act 2009 to maintain, facilitate and improve the performance of the financial system and entities in it5 and to ensure that all licensees meet the standards including their responsibilities to consumers6.

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Article, APRA calls halt to riskier lending, The Australian Financial Review, 2/8/11. http://www.asic.gov.au/asic 6 http://www.asic.gov.au/asic