News: WBC Australia's banking watchdog rejects blame for lenders' misconduct

SYDNEY, Oct 31 (Reuters) - Australia's prudential watchdog rejected on Wednesday criticism it was too soft in regulating the country's beleaguered banking industry, saying it is mandated to focus on material risks to banks' stability and not on their treatment of customers.

Australia's biggest banks are in damage-control mode after a powerful inquiry, called a Royal Commission, uncovered a culture of greed and widespread misconduct in the industry.

The Commission's interim report last month reserved special criticism for regulators that failed to pick up or punish problems ranging from billing fees to the dead to aggressive loan selling.

Responding to the report's criticism that it failed to prosecute banks and had too narrow a focus, the Australian Prudential Regulation Authority (APRA), said its handling of misconduct was "broadly appropriate" and reforming its remit was unnecessary.

"APRA has largely focused its response to matters that relate to prudential risks and on issues that may have a material impact on the regulated entity concerned," the regulator said in its submission to the Commission, published on Wednesday.

"That some information was not known to APRA is not surprising," it said, adding the scale of its task leaves it reliant on bank assurances that their behaviour is legal and fair, shifting much of the blame on to the banks themselves.

"Solutions to past problems must involve industry taking more responsibility, not less, for maintaining appropriate standards of conduct and guarding against misconduct."

The Commission has shredded the finance sector's reputation and value, with some A$60 billion ($43 billion) wiped from the market capitalisation of Australia's four largest banks and wealth manager AMP Ltd (AMP) since it was announced.

Investors are bracing for it to recommend structural changes and extra regulatory scrutiny when it issues its final report in February, though APRA said on Wednesday wholesale regulatory changes were not needed because it would unnecessarily complicate things. ($1 = 1.4116 Australian dollars)