The prudential regulator has called on bank chiefs to lift their game as a series of scandals engulf the banking system as it works with other regulators to improve corporate culture.
The chairman of the Australian Prudential Regulation Authority Wayne Byres told a Senate Estimates Committee hearing that APRA and the Australian Securities and Investment Commission had set each set up teams to focus on fixing corporate culture.
"Those two teams are sharing information about what they are seeing," he told a late night sitting of the committee.
"But as much as we can push and prod and encourage appropriate culture you can't just regulate it into existence," Mr Byres said.
"It does require, as well as continued lecturing from me and others, leadership from executives within the industry to improve behaviour."
The comments came in response to questions about the ASIC led investigation into potential manipulation of the Bank Bill Swap Rate, the benchmark index used to set rates on billions of dollars of securities.
ASIC was due to appear before the committee on Thursday and was expected to provide a detailed update on the progress of its multi-year investigation.
Mr Byres said incentive structures and remuneration frameworks within the banks were "worth looking further at" although he said it was "premature" to suggest that misaligned incentives were behind alleged interest rate rigging behaviour.
"There is a general issue that exits in financial institutions, in wholesale markets and retail markets that when you have reward systems that are heavily based on revenues then quite often we have tended to see behaviour that is not always appropriate."
Impact on consumers
Mr Byres was asked to explain what impact the alleged manipulation of the BBSW has on consumers.
"There is a presumption that when those contracts are entered into, that the index rate represents a fair market rate and whether you are paying that rate or receiving that rate you are earning or paying what is deemed to be a fair market rate."
"If behaviour distorts that then people will pay more or receive less than they should fairly have done."
Mr Byres said the "the extent, scale, impact, degree" of rate rigging was "difficult to predict".
"At the heart [the suggestion of rigged rates] is saying that people are transacting with one another on the basis that these indices represent a fair market rate and maybe the index was not a fair index rate."
Mr Byres was asked by Senator David Bushby why the BBSW could be tampered with when he was previously assured that it was set differently to the London Interbank Offer Rate (Libor) which was found to be systemically manipulated by traders and therefore could not be fixed.
"Libor was a hypothetical rate. There didn't have to be actual transactions so it was often sarcastically referred to as the rate with which banks don't lend to another," Mr Byres said.
"BBSW is set based on actual transactions within a particular window at a certain type of day. It's real so it gives you some comfort that people aren't just making up numbers."
He suggested that changes in market structure had potentially opened up the possibility that a rate initially assumed to be immune from manipulation could in fact be rigged by traders.
"What has happened over the last few years is that liquidity in markets has lessened and that has created the potential for people that try or wish to do so to test whether they could shift the market or move the market around."
The APRA chairman was also grilled by the committee after it approved an application for Wide Bay Building Society to become a bank after ASIC had found it had it failed to properly assess the suitability of loans to customers.
The senators also questioned the APRA panel about meetings it attended with politicians and advisers with regard to the extension of its powers as a result of proposed superannuation law changes.