AUSTRALIA'S top central banker on Tuesday rapped the country's scandal-ridden banks for their errant behaviour, saying that strong penalties were required to punish misdeeds, but cautioned that regulation risks crimping much-needed credit to the economy.
In a dinner speech in Melbourne, Reserve Bank of Australia (RBA) governor Philip Lowe said that banks should consider correcting their internal incentive system that focuses on sales and short-term objectives.
Mr Lowe's speech came as Commonwealth Bank CEO Matt Comyn testified under oath for a second day at a powerful government-mandated inquiry that has exposed widespread financial sector misconduct since the start of this year.
"The vast bulk of the people who work for Australia's financial institutions do want to do the right thing, and they do want to serve their customers as best they can," Mr Lowe said in the speech titled Trust and Prosperity. "But, like everybody else, they respond to the incentives they face."
Australian banks have been accused of predatory lending and poor financial advice as they amassed huge profits at the cost of customers' interest. In response to the allegations, they have slowed mortgage lending, their biggest source of revenue.
Mr Lowe said that banks need to take risks and manage them well. "If they become afraid to lend simply because of the consequences of making a loan that goes bad, our economy will suffer. So a balance needs to be struck here," he said.
"Strong penalties can play an important role in incentivising good behaviour, and this is an area we should be looking at. But we do need to get the balance right as there can be unintended consequences."
The banks have tightened lending standards in the face of pressure from regulators. That has exacerbated weakness in Australia's once-hot housing market.
Mr Lowe sounded comfortable about the softening in the property sector though that comes after "very large run-ups" in Sydney and Melbourne, the two biggest markets.
He also noted that the downturn in home prices comes against the backdrop of a strong world economy, robust domestic activity, falling unemployment, record low interest rates and rapid population growth.
"This is a reasonably favourable backdrop against which to be having an adjustment in the housing market," he said, adding: "But we do need to watch things closely."
He also touched upon stagnant real wage growth since 2012 that has hurt living standards even as Australia's A$1.8 trillion (S$1.8 trillion) economy has outperformed its global peers by extending its recession-free run for 27 straight years.
Weak wage growth has been the single biggest factor restraining the RBA from raising borrowing costs. It has left its policy rate at a record low 1.5 per cent since last easing in August 2016. REUTERS