Without offering a view on the PC report or other commentators, there is inevitably a tension between these two forces. Again, not a new observation. Prudential regulators who preside over both competition and system stability face a potentially intractable dilemma because greater competition inevitably and by definition destabilises the system.
“In both the US and Australia an established market was disrupted by new competition, the former ultimately catastrophically, the latter to the benefit of the economy.”
The critical question is whether consumers – and taxpayers – are better served in the long run by a particular stance on that inevitable tension.
Some would argue – as did Christopher Joye in The AFR Weekend – it’s a “flawed regulatory paradigm that presumes competition always undermines financial stability when it can reinforce it by reducing our reliance on the oligarchy”.
That argument is open competition reduces reliance on incumbents, removes cross-subsidies and rents, makes the system more flexible and ultimately delivers greater resilience. It’s a cogent argument – in theory, in the long run.
But it’s the getting there which needs to be carefully managed.
The most glaring demonstration of this is clearly the financial crisis of a decade ago. It was driven by new products, frantic competition and a lapse in risk management and prudential policy.
For years, would be borrowers benefited by receiving finance they previously would not have; mortgage originators and the creators of the debt products which funded them made money; various shareholders grew their wealth.
But the American sub-prime mortgage market was fatally flawed. Its collapse infected wider financial markets and taxpayers, borrowers and many organisations have been paying for it ever since. The global economy is only just recovering a decade later (although of course, some made money in the crisis - notably hedge funds which saw how fragile the whole contrived market was.)
In this case, innovation and competition went too far. Ultimately the broader costs to society were far greater than the initial cheap, readily available loans.
An Australian example also comes from the mortgage market which in the 90s was disrupted by a disaggregation of the sales, production and funding of mortgages.
Where banks had once dominated all three, mortgage originators and brokers entered the sales markets; investment banks like Macquarie Group the production; while investors funded the loans through securitisation.
In the process more than 2 percentage points were cut from mortgage prices. Cleary this was of aggregate benefit and system stability was preserved. However, as funding markets tightened and banks became more efficient, the new paradigm was undermined.
Indeed, investing in one of the original revolutionaries, RAMS, when it listed just prior to the financial crisis would have been catastrophic as the model crumbled. Aussie Home Loans, the highest profile new competitor, is now owned by Commonwealth Bank of Australia.
In both the US and Australian examples, an established market was disrupted by new competition, the former ultimately catastrophically, the latter to the benefit of the economy.
The PC report was explicit in arguing the Australian Prudential Regulation Authority, the banking supervisor, has erred on the side of system stability and taken actions which could actually lessen competition.
This too is not new. Indeed since the crisis APRA has consistently stressed its emphasis on system stability – in part because its own current incarnation is directly attributable to perceived failings, soon after it was formed, to prevent the collapse of Australian insurance giant HIH. A collapse which delivered enormous collateral damage to the Australian economy.
HIH was a poster child for new competition and price wars in the then staid Australian insurance and particularly indemnity market. Its collapse left thousands of businesses vulnerable and sporting or community organisations unable to hold events because they could no longer obtain public liability insurance.
APRA chairman Wayne Byres re-emphasised this attitude recently in response to suggestions from the Federal Treasurer APRA’s approach to restricting investor lending for property might be eased.
"We can modify our interventions as more permanent measures come into play," Byres said. "That will include, amongst other things, further strengthening of borrower serviceability assessments by lenders, strengthened capital requirements for mortgage lending imposed by us, and comprehensive credit reporting being mandated by the government."
That is, system stability takes precedence.
The PC however argued APRA’s macro-prudential measures designed to tamp down interest-only lending - primarily for investors and considered more risky - were anti-competitive and had delivered a $A1 billion annual profit windfall to the major banks.
This goes the heart of the dilemma: how do we gauge the short term/long term trade off in costs to society? The PC may be right in the short or mid-term but potentially not in the long term.
Reserve Bank of Australia governor Phillip Lowe has been clear in his view. He wants the macro-prudential measures made permanent and presumably sees systemic stability as taking priority.
“When I talk to my overseas peers and say more than 40 per cent of new loans in the country were to borrowers who didn't have to make a single dollar of principal repayment, they say, how?” he said during questions at a recent speech. “Why would you allow that?
"It didn't feel right to me. It felt like it was building up risk in the system so that was addressed and I would hope there would be a permanent element of that."
Indeed, the timeframe over which crises run appears easily forgotten. In the US, particularly under the Trump administration, measures and institutions created to lessen the risk of a repeat of the worst financial crisis in half a century are already being unwound.
Yet as the Bank for International Settlements noted in its latest review, “while banks in the euro area, the United Kingdom and the United States suffered large losses at the height of the crisis, those in Australia, Canada and Sweden fared better and did not need government capital support.”