Short memories fuel Mac Bank mortgage romp

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The AFR has an interesting story today about Macquarie Bank seeking to grab its share of the Australian mortgage magic pudding:

Macquarie Bank has posted an astonishing 55 per cent growth in mortgages to $6.2 billion over the past six months as it seeks to take advantage of big profit margins on home loans and ramp up competition against the big four banks.

It is believed Macquarie Group deputy chief executive Greg Ward is determined that the traditional investment bank should become a more serious player in retail banking.

The mortgage growth has come from selling home loans through Mark Bouris’s mortgage broker Yellow Brick Road and its own distribution network.

Although Macquarie has continually downplayed the significance of its greater focus on home loans, some sources claim it has aspirations to become the “fifth pillar” in home lending against the big four banks, which control almost 90 per cent of the mortgage market.

This is not quite as astonishing as it’s made out to be. $3.2 billion growth in the mortgage book over six months is roughly 9% of total system growth. Not bad, sure. And showing some intent. But hardly astonishing.

The more interesting question is how Mac Bank intends to fund the expansion:

One industry source who has been analysing the opportunity for new players to move into the mortgage market said the major banks were vulnerable to a new aggressor in the mortgage space. This is because the big banks’ mortgages are funded by more expensive credit sourced several years ago when funding costs were much higher.

In contrast, a new competitor can grow quickly by offering discounted rates on mortgages which can be funded by cheap credit now on offer in the wholesale and residential mortgage backed securities (RMBS) markets.

Ah, well, maybe they can and maybe they can’t. That will depend rather upon APRA and it’s demand that bank’s fund new mortgages via deposits. Mac bank has $30 billion or so already, according to the article. Then there is the ratings agencies to consider.

Moreover, one wonders why neither the “industry source”  nor the journalist mention that the same business model – “offering discounted rates on mortgages which can be funded by cheap credit now on offer in the wholesale and residential mortgage backed securities (RMBS) markets” – culminated in the collapse of the non-bank sector during the GFC as well as threatening mid-tier banks which caused significantly greater concentration not competition.

Short memories.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Crocodile Chuck

    And Macquarie and Suncorp both beat a path to Rudd’s door pleading for a gov’t backstop that fateful weekend in October ’08…….

    Ask Macquarie!

  2. In a prior life all Macquarie Bank loans were securitised and sold to the market.
    In their current format they are an ADI and hold a depositor base. They are quite intent on achieving their aims.

    • The taxpayer should be getting so much more for the deposit insurance. Who would have their hard earned with MacRisk if it wasn’t backstopped by joe taxpayer.

      Have to hand it to these guys – when it comes to playing politicians and the system they nail it.

      Caveat emptor for any punters, or those from the small end of town, prepared to get into bed with an investment bank.

    • Prior to the GFC Macquarie were not an ADI, their banking model is now completely different. Before the GFC they were no different to RAMS or Aussie Home Loans securitising loans. A bank in name only, but now hold a full bank licence.

      They exited the market for some years, and their return was always going to see large increases on a low base. Probably a smart move to team up with YBR. Mac is a low cost model bank with no branches, low staff numbers. A larger than normal trading desk risk though.

      • That’s exactly my point – their total deposits would = 0 if the government wasn’t stumping up for the risk.

  3. Can we really rely on APRA to hold the ‘players’ to deposits only when the pressure is on (a sagging post debt boom economy) and the choices are:

    1. expand household debt

    2. expand household debt

    After we know the RBA are already getting their ‘story’ straight on that front.

    • I have my doubts but have not yet heard otherwise. The betrayal by the RBA did not help. It’s one thing to not discuss macroprudential another entirely to egg on its demise.

  4. Its nice to see that you’re a slave to APRA’s rhetoric that deposits are less risky than properly matched funding through RMBS.

    I thought it was MB’s way to not just accept regulators self interest but to challenge the illogic of it all with proper research. Perhaps this has changed.

    Without agreeing one way or another with Mac Bank’s funding model, this country needs the strangle hold of the majors broken, ie a mich larger number of smaller banks. What’s your argument against that?

    • Come now. I can;t reiterate every argument in detail on every post. I’ve argued this exhaustively over three years. Slave? History is self-evident on this front. I’d have no issue with it if RMBS hadn’t frozen during the GFC. But they did. Deposits didn’t.

      • Deus Forex Machina

        As a former Treasurer the point of RMBS is that it IS matched funding – once it is there it is there it can not leave your balance sheet in the way that deposits can.

        The love of deposits is more about displacing offshore money than it is that they are better than matched funding. There is no liquidity risk if funding is matched.

        RMBS markets closing during the GFC was only an issue if you employed a growth of assets for growth sake model and didn’t have the liabilities (either able to issue RMBS or take deposits) to fund the assets.

        So RMBS markets closing wasn’t such a big deal for the Treauser who had his funds set but rather for the bank manager who promised his board and shareholders that he could grow his balance sheet and tasked his treasure to get funds that didnt exist.

        Its the old paradigm growth = assets which should be challenged (and is by APRA and here at MB I think) not the method of funding per se which is the key

        • Looked like liquidity risk to RAMS and St George.

          Anyway, let’s not forget the context for this discussion.

          Mac Bank or some associated source telling us they can grow aggressively using RMBS to cut prices.

          • Deus Forex Machina

            Yes – understood.

            What I would say is that I have targetted a cost of around BBSW +100 as a “fair” post GFC cost for RMBS issues.

            Realistically for essentially secured assets its still too high but at that level you can originate and service the loans and still make money and the investor gets a sweet deal.

            Westpac recently did a deal at bbsw +85 so its very economic at these levels in a marginal revenue/marginal cost kind of way.

            Nothing like the 10/15 levels we saw pre-GFC but you can make a dollar again.

            Cheers Mate

            Greg

      • HnH

        Deposits effectively froze during the GFC. Deposits were guaranteed. RMBS was not.

        Now we have explicit and implicit deposit guarantees which are unpaid for and allow our senior bankers to slap themselves on the back for doing such great jobs and then pay themselves hugely for this taxpayer granted privilege. Yeh, that’s a great system to support

  5. Digging yourself into a hole here fella.
    i) Overall housing growth in low. So if Macquarie/securitisers are doing lots, other people are doing less
    ii)Macquarie is originate and distribute and are only using their balance sheet as a warehouse. The subsequently securitised assets are owned by someone else. In the real world as pointed out above there is zero funding risk with a securitised mortgage. Admittedly there is business risk for those who rely on securitisation for funding, but thats far less systematic.)APRA has no issues with the use of securitisation as funding diversification
    iii) I think Macquarie group converted to an ADI/non ADI structure in 2007.

    So, of itself, its not a new mortgage credit bubble unless you think the elasticity of the market to changes in margins has changed and a lower margin of 0.10% will create a boom, its not adding to systemic instability (the opposite), its not increasing the implicit liability under deposit guarantee.
    And by the way, can you let us know exactly what macro prudential controls you would put in place and why they would work and why they would not be arbitraged away.

    • It’s a fair point about Mac Bank so long as they aren’t using securtitsation to fund themselves, which exactly my point. Way to misrepresent me. But I will add that both St George had very significant deposits and could not really be considered to be funding itself with securutisation yet it got into very deep water when RMBS froze up.

      My problem is simple and has not changed at all since the GFC. Securitisation does not mitigate risk, it shifts it only. If you make the issuer keep enough of the pool to force risk and capital reservation onto it then it becomes uneconomic. If you don’t force a large enough equity tranche into the issuer then it’s responsibility free lending and eventually you’ll face a run by investors unless you guarantee them as well. To me it makes more sense to guarantee depositors only.

      On MP, I would make available every tool but especially LVR restrictions. 90% max, the end.

      If they get gamed then I’d tighten them again. Regulation is just this process of tightening then gaming then tightening again. It takes a regulator with an IQ of about 90 to do this.

      By your argument we should just throw in the towel and give you the keys to credit creation. That’d work great, eh? For you anyway. Until you blew us all up.

  6. HnH. just read some interesting similar concerns regarding both US and UK.

    Bank Confiscation Scheme for US and UK Depositors
    Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here [1]); and that the result will be to deliver clear title to the banks of depositor funds.

    …In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders.
    URL to article: http://www.ritholtz.com/blog/2013/03/bank-confiscation-scheme-for-us-and-uk-depositors/

    Also referencing same on
    http://www.jsmineset.com/2013/03/30/jims-mailbox-1219/

    …Executive summary

    “The financial crisis that began in 2007 has driven home the importance of an orderly resolution process for globally active, systemically important, financial institutions (G-SIFIs). “

    “In the U.S., the strategy has been developed in the context of the powers provided by the Dodd-Frank Act of 2010. Such a strategy would apply a single receivership at the top-tier holding company, assign losses to shareholders and unsecured creditors of the holding company, and transfer sound operating subsidiaries to a new solvent entity or entities”

    pg 14 report pg 17 pdf

    Conclusion

    64 In both the U.S. and the U.K., legislative reforms already made or planned in response to the financial crisis provide new powers for resolving failed or failing G-SIFIs. The FDIC and the Bank of England have developed resolution strategies that take control of the failed company at the top of the group, impose losses on shareholders and unsecured creditors (the depositors) —not on taxpayers—and remove top management and hold them accountable for their actions.

    Question: could Mac be doing the same (including pillars). With offshore borrowing, global interconnectivity, counterparty and contagion risk and last time I looked (some while ago) $15Trillion of derivatives at the RBA listed?

  7. Sad really all the supposed geniuses at Mac bank can think of doing … wait for it … mortgage lending.