It seems to me the banks have no incentive to take fewer risks.
A bank in this regulatory environment cant compete on "safety" for customers, and deposits
if the RBA made month assessments of banks risk management, and assigned a risk index to their loans and practices, and published these, then banks would have to start to compete for deposits and funds on the basis of underlying practices.
Furthermore if the RBA set the capital adequacy ratio based on the level of risk undertaken by banks then there would be a direct financial incentive for banks to be safe.
e.g.
Banks makes loans on the basis of share or other collateral with a high degree of valuation variability - Capital adequancy required - 20%
Bank involved in purchase of overseas securitised products where it has lower chance of correctly evaluating risk - captial adequacy required - 15%
Boring bank which only loans across a spread of assets in australia such as lowly leveraged companies with <50% leverage, and high doc mortgages - capital adequacy required 8%
Suddenly shonky lending will disappear overnight. !!
