Australian banks lobby against macroprudential

By Leith van Onselen

In the wake of APRA’s warning to banks not to lower lending standards, and the increased speculation that Australia’s financial regulators might follow New Zealand in adopting macro-prudential controls on higher risk mortgage lending, the head of the Australian Bankers’ Association (ABA) – lobby group for the banking sector – has come out warning against imposing mortgage limits, since they would push first home buyers (FHBs) out of the market. From last night’s ABC’s The Business (video above):

“We need to make sure that we don’t put in place any measures that are unnessessary, that actually make it difficult for some people to get mortgages. The sorts of loans that APRA has raised concern about are exactly the sorts of loans that FHBs need to be able to get into the market”.

Data released late last month by APRA showed that high risk mortgage lending is on the rise in Australia. In particular, loans of greater than 90% loan-to-value ratio (LVR) have risen from 10% of total issuance in 2011 to around 13.5% currently, with loans above 80% LVR now accounting for around 33% of the total. To add insult to injury, a whopping 39% of new home loans issued by banks over the June quarter were interest-only.

While such types of lending may not pose a problem while the economy remains sound and interest rates low, they significantly raise the probability of financial instability in the event that interest rates were to ever rise or the economy deteriorate as the mining boom unwinds. Accordingly, it is in Australia’s best interest, and the interests of FHBs, to move now to curb higher risk mortgage lending and house price growth via macro-prudential controls. The RBA’s own extensive research has shown macro-prudential policies to be effective in mitigating the credit/housing cycle, as has research from the Reserve Bank of New Zealand (RBNZ).

There’s also another reason to favour macro-prudential controls on mortgage lending. It would not be drawing too long a bow to suggest that governments of all persuasions have abrogated their responsibilities for housing policy to the RBA – allowing affordability concerns to be addressed via continuous lowering of interest rates, rather than addressing the underlying causes of poor affordability through supply-side and taxation reform.

Implementing macro-prudential controls on mortgage lending, along with jawboning by the RBA on the need for structural housing reform, would force governments to take responsibility for housing and address the problems head-on via policy reform.

New Zealand has taken such actions. The RBNZ has lowered its credit support, forcing both sides of politics to commit to housing policy reform. Australia needs to do likewise.

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Unconventional Economist

Comments

  1. mine-otour in a china shop

    What a surprise! With APRA’s pricipals-based regulation stance, and its speeches and papers which back close co-operation between agencies as a policy response, all will be safe. The bankers must be really worried about the paper and discussions between policymakers. The ABA release is a swift reminder to them who is really in charge, just in case…

    I cant see Laker/Littrell or Stevens/Ellis even considering Macroprudential as a likely banking policy option. Sure we know better than the rest of the world, and to introduce now would probably send a panic through the market and see a reversal of the trust based agency co-operation approach that has brought us to this point (safe if you are a policymaker, high risk for some others).

    Also with some retirements imminent it might jeopardise the “legacies” of these people.

    Leave it to the next guy to sort out. Nobody saw it coming….

    • “What a surprise! With APRA’s principals[sic]-based regulation stance”

      Not sure if principals instead of principles was a typo, but if it wasn’t it is a very perceptive pun!

      • mine-otour in a china shop

        “APRA-CADABRA” – make the bank risks and LMI Stress tests go away… there is another pun for you!

  2. Decades ago, I remember seeing these hippies protesting globalisation or more so global giant companies. Can’t remember what they were called? At the time I thought nothing of it. in hindsight, they were the most forward thinking geniuses the world has ever ignored. Now Of course the damage is done and it seems so many have a twisted vested interest in it nothing will or can be done. Where will this take us?

  3. Won’t somebody think of the FHB!

    The only surprise in this article was that it was not pictured with the obligatory pigs in the trough image.

    They’re addicted to the mortgage market again. Anything that takes the sting out of it and moderates is good in my opinion. We don’t want a repeat of the noughties.

  4. The increasing proportion of high LVRs / interest-only loans are a concern.

    But it is not the Australian regulatory way to be heavy-handed, Leith. More likely, subtle background adjustments to the risk-weightings on high LVR residential mortgages would be APRA’s style…

    Achieves the same thing, but without the the big headlines (and ‘disciplinary feel’) that accompanies RBNZ’s approach.

    Anyone know if these risk-weightings are publicly available and/or routinely adjusted in this manner?

  5. “We need to make sure that we don’t put in place any measures that are unnessessary, that actually make it difficult for some people to get mortgages. The sorts of loans that APRA has raised concern about are exactly the sorts of loans that FHBs need to be able to get into the market”.

    Translated, this is bank language for:

    “How else are we going increase our bottom line for shareholders, give ourselves big fat bonuses and put the tax payer in further danger by ever increasing our leveraging?”

  6. Canada has been tightening for a few years without crashing the party. I think the market here could benefit from
    -Capped amortization terms 30 max, axe interest only.
    -If the government won’y address NG, maybe they can do a sneaky reacharound with tightened total debt service ratio limits.

    First time buyers are always going to be high risk, but investors are adding a whole other level of risk with interest only highly geared portfolio’s.