Will Fitch pull the trigger ?

Back in May I noted that Fitch had this to say on their future strategy for dealing with Australian bank’s housing credit issuance.

… Australian banks could have their credit ratings cut if they lower standards to boost mortgage sales as demand for home loans slumps.

“If we do start to see signs of erosion in those lending standards, there may be some negative pressure on ratings coming through,” Tim Roche, director of Fitch’s financial institutions group in Sydney, told a credit forum today.

Which makes me wonder if they noticed this from news.com.au today.

Fresh evidence is emerging of a “race to the bottom” among banks and other lenders as demand for mortgages slides and competition boils over.

Lenders are increasingly cutting standards by enabling home buyers to make smaller deposits, new research indicates.

About three in every five mortgage products now enable home buyers to borrow up to 97 per cent of the value of their property, according to financial research group RateCity.

RateCity chief Damian Smith said the rise in loan-to-value ratios (LVR) indicated that lenders wanted to kick-start growth in the sluggish home loan market.

“We haven’t seen this level of money offered to mortgage borrowers since the start of 2009,” Mr Smith said.

He warned that change in lending criteria was putting borrowers at risk.

In the post-GFC world where rating agencies are striving to gather back their creditability and given that it now seems that the rating agencies are the defacto guardians of macro-prudential quality, one has to ask the question…. Will Fitch pull the trigger ?

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  1. The question should be asked – Will anybody pull the trigger on the rating agencies?

    They seem to be in charge of ruining entire nations (PIGS) with their ‘expert’ credit rating.

  2. Thanks DE. I’m going to ask Fitch directly.
    The answer will be somewhat predictable because Fitch’s business model is to follow not lead but they’ve certainly set themselves up for questions

  3. I just cant believe the Aussie banks. DID THEY NOT LEARN FROM THE MISTAKES OF THE US, UK, SPAIN, GREECE, ETC……. They have become so arrogant and think they are invinceable. They will be the down fall of Australia economy. Just watch and see.

    • Actually they’re just rational after learning what happened in the US and Europe. The bankers know that now prob the best and limited times left for them to enrich themselves before Australia gets the same problem like in the US. They know for sure that as Too Big To Fail banks, the taxpayers will bail them – it will be similar exercise: “make the profits / bonuses private and let the public gets the losses”.

    • I notice in the BIS paper they mention “a confluence of factors that Mr. Bernanke saw.”

      Wait for the confluence of factors that they won’t or can’t see from their modelling. Until it’s too late that is.

  4. lending standards dont matter to banks anymore. This is the age of “too big to fail” where they know they will just get bailed out if they wright bad loans. All that matters is short term profits and bonusses. But it ensures that when the SHTF its going to be way worse than previous downturns.

  5. A country’s current account is the result of the difference between its savings and its investment. Australia typically has more investment opportunities than its domestic savings can finance, so it runs a deficit which is financed on the world market.

    What a load of complete tripe! I forgot to look at who wrote this rubbish. No wonder Joe Bogan has no idea what is going on in the world!!!

  6. What really needs to happen is for the Australian government to state that there will not be any banking bailouts under any circumstances.

    As tough as it may be in the short-turn, I think we will quickly see banks tighten their lending requirements at an amazing pace…

    • Even if the government was to come out and explicitly state that there would be no bailouts, it isn’t really a credible threat.

      Failure of any one of the big 4 would wreck havoc on the Australian financial system. The government knows that, and more importantly, the banks know the government knows that.

    • Sam Birmingham

      No can do, old chum

      Moody’s (?) have already said that Australia’s banks would be a a notch or two lower down their credit ratings, but for the implicit Government backstop.

      For a government to specifically rule out any bank bailouts would immediately knock the banks down a few pegs, ratchet up their funding costs, with the burden then promptly passed on to homeowners… And what all know what comes next.

      I’m not saying bailouts should be sanctioned, but the reality is that we are hooked on cheap credit and the doctor only knows one prescription – more of the same…

  7. Haven’t there been political calls to impose a profitability tax on the Big 4 to back up our banking system? Can’t recall who said that recently but it was one of those independents… wonder what if they will give crazy irresponsible people like me a mortgage for that fibro shack at Portarlington I’ve been eyeing off!

  8. The role of Fitch and S&P will be interesting. They would be aware of the arguments suggesting we do have a bubble and will not sit back as our banks decide to lend into a market when the signs of mortgage stress is already apparent.

    They warned not to do this and that HAVE to pull the trigger.

    In fact, I believe there could be a big contigent of overseas speculators waiting to short our banks for big profits. The dodgy arguments put forward by our banks (CBA fudging the income-house price ratios and mythical shortage figures) will not fool the ratings agencies once they see some sustained and widespread falls..they will be ahead of this crash, not behind it. This will perpetuate the problem by increasing mortgage rates and add to the crash.

  9. Hi DE,

    Good topic to discuss, and I agree they may well pull the trigger like Moody’s e.g..

    It’s a very privileged position they occupy, and I don’t know if they are regulated, so what are the consequences if they’re not? Do you know?

    I’m overly suspicious of these guys given Buffett had a pretty big holding of Moody’s at one point, and none of them saw anything coming.

    The more I see of this site the better served I think we are. Pretty impressive posting all around in my opinion.

  10. Guys, do you really think the folks who lend serious money to banks need a rating agency to tell them what you and I already see?

  11. Hmmm, do we have fractional reserve banking or not in Oz? Wikipedia and some other pages state Australia doesn’t have a reserve ratio? Anyhow, I found the following line interesting from a related article re deposit to loan ratios:

    “According to Credit Suisse, the banking system has only $33 in deposits for every $100 it has lent out.”