Certainly, one way to kick up lending would be to soften regulation in the banking sector, including responsible lending laws and the need for banks to hold large stores of capital against their loans.

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The CBA’s approach to testing the limits of the current regulatory straitjacket has been to increase the volume-based bonus it pays to its in-house bankers from 50 per cent of base pay to 80 per cent.

Unsurprisingly, CBA’s move to dump the bonus caps recommended by the Kenneth Hayne-led financial services royal commission has already attracted the ire of the corporate regulator (the Australian Securities and Investments Commission), which is threatening to increase its scrutiny of the bank.

The Hayne royal commission had recommended that enforcing a cap was a critical to preventing a return to the days of outsized bonuses that fed high-pressure sales tactics and undermined the need for the banks to do what was in the best interest of the borrower.

For its part, CBA argues that the move to increase bonuses is an attempt to stop mortgage sales staff from moving into mortgage broking – where remuneration is largely commission-based.

But logic suggests that as CBA sweetens bonuses for its home loan sales people, other banks will be forced to follow suit or risk losing their own sales people.

Meanwhile, ANZ boss Shayne Elliott and National Australia Bank’s outgoing chief, Ross McEwan, have been arguing a different route to greater profits.

They suggest that banks in the post-royal commission landscape have been forced to become too risk-averse, with only the wealthy borrowers able to meet the strict parameters for borrowing, while other borrowers miss out on the credit needed to get into the housing market or establish small businesses.

Elliott says this regulatory conservatism breeds exclusion and that this comes with a social and an economic cost. And the lenders further point out that if borrowers can’t access the big four banks, they run the risk of signing up with the less-regulated non-bank lenders.

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The banks, with their vested interest in selling more mortgages, clearly think there are customers out there who could fund their loans, but are excluded thanks to the responsible lending requirements.

The flip side of this coin is that our banks enjoyed extremely low rates of loan delinquencies during the pandemic and in the surging interest rate period that followed.

That has kept their coffers humming nicely, although the fierce competition in the sector has perhaps prevented them from fully capitalising on the rising interest rates.

With signs of a looming earnings squeeze, the banks want to kick-start another round of lending. However, they walk a tightrope on not only testing the limits of current regulation, but also just how much extra risk they can safely digest.

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