Could the response to the Banking Royal Commission be too harsh? The RBA is clearly worried.
One of the headwinds looming for the property market is the fall out of the banking Royal Commission.
I mean, it was so serious they had to get ‘Royalty’ involved. I’m sure Meghan and Harry were taking a very keen interest in between cuddling koalas.
We’re already seeing a chilling effect on the credit market, as the banks try to get ahead of the game and get their houses in order.
And the spikey end of the stick with that is serviceability calculations. One of the key revelations is that the banks were possibly lending people more money than they should have, particularly by under-calculating their living expenses.
So the banks are going hard now, and mortgages that would have just got a rubber stamp 18 months ago are now being poured over with a fine tooth comb.
That’s been a bit of a drag on things.
But that’s all before the Commission has even handed down it’s report, and the recommendations that are probably going to come with it.
That’s due in February.
That creates a political risk in my mind.
It’s political because the government will have to respond to the recommendations.
And with the Morrison government taking a belting on every front right now, there’s every chance we could get something a tad ‘populist’.
(Remember it was Morrison who came up with the bank levy tax.)
And that could leave the banks reeling, and it may be the blow that knocks lending to the floor.
APRA restrictions, uppercut. Royal Commission preliminary findings, right jab. Morrison implementation of findings, whirling haymaker.
Now I’m no fan of the banks, but I am a fan of property and business lending, and it would be a shame if property owners, investors and business owners end up bearing the brunt of all this.
But surely we could trust the government not to do anything ‘rash’?
Hardly. In an election year, with the Prime Minister struggling for legitimacy, we’ve got all the ingredients for some pretty wild policy thought-bubbles.
Expect them to go for headlines, not for sustainable reform.
Now this might sound like Jon’s got his cynical hat on again, but I’m not the only one worried about where this might be headed.
The RBA and Treasury have also taken the unprecedented steps of cautioning the government against going too hard.
The AFR was reporting that:
The Reserve Bank of Australia and Treasury have privately cautioned the Morrison government that any regulatory response to the financial services Royal Commission must be careful to avoid putting the brakes on lending to home buyers and business.
Treasury then doubled down on their private warnings, taking it public last week:
Treasury secretary Philip Gaetjens has warned that a key risk to Australia’s strong economy is banks cutting their lending too much in response to the Royal Commission into financial services and tougher credit rules imposed by the prudential regulator.
Amid complaints from small business and home buyers that they are finding it harder to attain finance, Mr Gaetjens said a tightening of credit conditions could constrain household consumption and business investment.
Now some people might say that this just proves that the RBA and Treasury are in the banks’ pockets.
But I actually think it says the opposite. Both institutions know full well the carnage that could be unleashed if the government went too hard now, just as the impacts of APRA restrictions are still being digested.
This is not a time for rash policy on the run. This is a time for cool heads.
Let’s hope the heads of Treasury and the RBA prevail.