The prudential watchdog admits it has been in a "tug-of-war" with banks trying to raise the industry's lending standards after a roll-call of misdemeanours were revealed in just the first few weeks of the royal commission.
Australian Prudential Regulation Authority chairman Wayne Byres has told the House of Representatives economics committee there has been a "general sloppiness" in bank processes in pursuit of being competitive.
He also defended APRA's decision to set a 30 per cent limit on interest-only residential loans and did not believe it had affected competition because it was primarily the larger banks that exceed that benchmark.
"We had too many borrowers who just didn't pay a cent back on their loan and that is unhealthy in the long run," Mr Byres told the hearing on Wednesday.
Committee chair, Liberal MP Sarah Henderson, pointed out that in the space of a couple of weeks of hearings at the royal commission it has discovered cases among the big four banks of fraud and bribery, failure to monitor the actions of mortgage brokers, delays in responding to regulatory concerns, credit card oversights and inappropriate car loans.
"We are talking about a very large range of conduct which obviously should be of very major concern to APRA. Do you think APRA could have done a better job?" she asked.
Mr Byres conceded it was clearly a disappointing set of outcomes and shows the banks in a very poor light, but said this was not entirely surprising.
"We have been calling out poor residential lending standards for some time and the need for those to be lifted," he said.
"We have been working with the industry and sometimes engaged in something of a tug-of-war with the industry to try and improve standards across the board."
He said the issues facing the royal commission to this point have been about the adherence to responsible lending laws which are administered by the corporate watchdog, the Australian Securities and Investments Commission.
"The issue of conduct and fraud will be pursued by the corporate regulator and potentially by the police," Mr Byres said.
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