The government is coordinating an attack on the banks… but why?
I’m getting the feeling that all the financial regulators are working together on something. I’m just not sure what it is.
Lately, they’ve all been singing the same tune. They’re all “on-song”, and that song is about the banks letting Team Australia down by lending out more than they should to people they shouldn’t.
Naughty banks. When will they learn?
It makes me wonder if the government is up to something here. They haven’t come out all guns blazing like General Custard at the Okey-Dokey Coral. Rather, they seem to be slowly building a case for a more aggressive role.
And I think they’d have to do it slowly slowly. The financial sector is huge. You can’t win a PR war with an industry with pockets like that. All politicians would have noted the shellacking the Minerals Council’s PR arm gave the Gillard government.
You’ve got to build your case slowly and carefully. Brick by brick.
And this case is almost a year old now. It started just before Christmas last year, when APRA sent the banks a letter asking them to get growth in investor mortgages below 10%.
It took the banks 6-months to pull the finger out.
Until recently though, we didn’t hear much from any one else. Generally, the tone was business as usual.
But that has started to shift in recent months, and now the organs of government seem to be ramping up the pressure.
The tone from the RBA for example has been much more cautious recently. Last month, their bi-annual Financial Stability Review conceded that lending standards have been weaker than would be ideal, driven by sloppy documentation and verification:
While housing lending standards have been better in recent years than in the years leading up to the financial crisis, recent investigations by regulators have revealed that standards were somewhat weaker than had originally been thought. As a result, some borrowers have had less of a safety margin against unexpected falls in income, increases in expenses or increases in interest rates…
In some cases, practices have not met prudential expectations, potentially placing lenders at risk of breaching their responsible lending obligations under consumer protection laws. In particular, poor documentation and verification by lenders in many instances suggests that some borrowers may have been given interest-only loans that were not suitable for them. Serviceability assessments also seem to have been especially problematic: the common (and prudent) practice of applying a buffer to the interest rate used when calculating the allowable new loan size had in some cases been undermined by overly aggressive assumptions in other parts of the serviceability calculations…
A week later, APRA head, Wayne Byres, gave testimony to the Senate Standing Committee on Economics in Canberra, where he said that lending standards had fallen to “horribly low” levels that lacked “common sense”.
Yes, he really said that.
“We were a bit surprised by how much the competitive pressures in the industry and the competitive dynamic in the industry, had led people to do things, albeit at the margins but nonetheless, do things that were really in our view lacking in common sense”…
“We had spent a lot of time in 2013 and 2014 reminding [Authorised deposit-taking institutions], reminding their management, reminding their boards, about the importance of lending standards, we sought assurances from boards that they were on top of these issues”, he said.
Later in the hearing, Mr Byres defended APRA’s 10 per cent cap on housing investor credit growth against claims it was preventing some smaller lenders from competing aggressively in regional areas where house price growth was soft. He argued competition between banks had dragged loan standards to “horribly low levels” in some areas…
“With the benefit of hindsight, obviously we wish we got onto this a bit sooner, but we are where we are. If we act too soon we get accused of being too interventionist and managing institution, it’s a delicate balance to be had,” he said.
Now, the Australian Securities and Investments Commission (ASIC) will launch an inquiry into the mortgage broking industry, which has accounted for the lion’s share of investor loans. From The Australian:
Assistant Treasurer Kelly O’Dwyer has written to ASIC commissioning the inquiry after the [mortgage broking] industry helped fuel a surge in investment property lending and booming house prices in Sydney and Melbourne.
Broker loans accounted for 82 per cent of the increase in new home loans in the September quarter, according to the industry peak body…
ASIC has been asked to look into the ownership structure of the industry and remuneration offered by the big banks and smaller lenders.
It will also investigate the proportion of loans written by brokers to their owners versus those of other lenders.
And it will consider whether remuneration is paid in line with the loan amounts written…
The inquiry is due to report by the end of next year.
This comes after ASIC investigated interest-only loan practices at the banks, and found that, actually, it’s not so bad. Interest only loans tend to be used by wealthier borrowers and they hold significant amounts in off-set accounts.
I think it is worth looking into conflicted renumeration at the brokers, but I’m not sure what all the fuss about interest only loans is about.
Rather, the regulators seem to be building a story. And that story says that banks (and their mortgage brokers) have been gaming the system and putting us all at risk.
Well, if that’s true, do something about it.
But we haven’t seen them move…
And so I wonder what that move will be… closer over-sight? Higher capital reserves? Lending restrictions?
But when it comes, I guess next year sometime, the media and the public will be well and truly sold on the line that something needs to be done to sort out these dodgy banks…
Check-mate financial sector.
But what are they going to do?
Watch this space.
What do you think is coming?