more competition in the housing lending space. and foreign bank branches have utilised intragroup funding and wholesale deposits to compete in areas such as institutional lending. despite the dominance of the four major banks in the market for deposits, competition has increased in this space as well. foreign banks have introduced innovative online saving accounts, allowing them to compete for deposits without having a large physical presence. more recently, financial technology brings the possibility of even more contestability in the financial system. competition and innovation are to be encouraged. regulators nevertheless need to be alert to developments and any potential implications for financial stability. there is, consequently, a great deal of interest internationally on whether developments in financial technology will have implications for financial stability. while competition can, at times, pose challenges for stability of the financial system it is also true that large banks pose particular risks. a strong framework of prudential regulation and proactive supervision are therefore necessary regardless of the specific structure of the system. the actions taken on housing lending in australia over the past few years are an example of how active supervision can address risks that might arise in an environment of heightened competition. over the past few years, the regulators had observed very strong growth in lending to investors for housing. furthermore, a large share of that lending was interest only for the first 5 – 10 years of the loan – that is, the loans were not being amortised for a very long time. and this behaviour was being fuelled by competition between the banks. individual banks were reluctant to pull back because if they did so, the business would go to their competitors. this raised concerns about the financial stability implications if this behaviour continued. so in late 2014, with the support of the council of financial regulators, apra introduced a 10 per cent ‘ speed limit ’ on growth in investor housing credit as well as tighter lending standards. the australian securities and investments commission supported this with work on responsible 5 / 9 bis central bankers'speeches lending. this was followed up in march this year with a limit on the share of interest - only loans and further guidance on lending standards. as wayne byres ( the chairman of apra ) recently highlighted, the concerns that prompted action were not about competition on interest rates or customer service standards. rather, the concern was that competition was manifesting itself in an erosion of lending standards. not only were the banks taking on more risk, but households were carrying a higher level of debt that they would have to service, which could be particularly concerning in the event

over the years since the global financial crisis. they are all now more focussed on housing lending and some are pulling back from wealth management and international operations. finally, it could also be argued that a large bank is, by its nature, more complex and hence more difficult to supervise than a set of smaller banks. the academic literature doesn ’ t provide much guidance on which of these views is likely to be of 4 / 9 bis central bankers'speeches more relevance for australia. but is there anything we can say from experience over the past couple of decades since deregulation? has increasing competition from new entrants had an impact on financial stability? has the concentration of the system resulted in concerns about financial stability? i will take both these issues in turn. the issue of competition in australia ’ s banking system has generated a lot of interest. there have been a myriad of reviews and inquiries over the years. indeed, another inquiry into competition in the financial system, undertaken by the productivity commission, has just kicked off. and the australian competition and consumer commission has recently been tasked with keeping a watching brief on competition in the financial system. the bank supports the productivity commission ’ s work on competition. but in the context of what competition might mean for financial stability, it is worth making three points. first, concentration of itself does not necessarily imply a lack of competition. indeed, indicators of market structure such as measures of concentration are not regarded as a very accurate measure of competition. in principle, four large banks could still compete very actively among themselves. so if you have a concern that competition could lead to financial instability, having a concentrated system will not necessarily address the issue. second, competition tends to be pro - cyclical. competition on the lending side tends to hot up during the good times. lending for housing, for example, has been pretty competitive over the past few years. in tougher times, however, competition for some types of funding, particularly more stable types, tends to increase. post - crisis, for example, banks looked to increase the amount of deposit funding relative to wholesale funding, increasing competition for deposits, and in particular, term deposits. regulators therefore need to be aware of this and take it into account when considering financial stability. third, at least some sectors of the market do appear to be contestable, as demonstrated by the impact that new entrants have periodically had on the competitive landscape. the arrival of the mortgage originators in the 1990s, for example, resulted in