Capital requirements are not constraining insurers and banks’ capacity to compete, Australian Prudential Regulation Authority (APRA) Chairman Wayne Byres says.

“In housing lending, commercial insurance and group life risk, we see evidence of quite aggressive competition, unfortunately perhaps not always to the community’s long-term benefit,” he told a recent Sydney conference.

The financial system has maintained returns by becoming more efficient while absorbing higher regulatory requirements.

Mr Byres says insurers are operating “comfortably” above minimum capital requirements and have adjusted well to the Life and General Insurance Capital reforms.

They have reasonable capacity to absorb shocks and raise more capital when needed.

The banking and insurance industries are making returns on equity of about 15% “and rarely have these dipped below 10% over the past decade, despite varying economic conditions and a strengthening of the regulatory framework”.

Current returns are near decade-long averages and it is debatable whether a safer financial system should be expected, or need, to generate the same returns as in the past, Mr Byres says.

He says it is not clear whether industry consolidation has significantly improved efficiency, and although the financial system has become more concentrated there have been new entrants in insurance and deposit-taking institutions.

“Over the decade many of the new entrants have been foreign-owned, and they have helpfully added competition, expertise and innovation to the financial system.”

Although this has slowed, it may recover once global institutions repair their balance sheets and look to international expansion, Mr Byres says.