Would macroprudential hit business credit?

Advertisement
images

Some interesting commentary today from The Australian on possible macroprudential rules:

A CONSULTANCY founded by former chief risk experts of two major banks has warned macro-prudential rules to cool house prices may restrict small businesses’ already strained access to credit.

…”The fact things have started to move doesn’t necessarily say there’s a bubble,” Mr Auty said.

…Mr Auty said the macro-prudential rules in NZ would hit new homeowners rather than investors who are driving growth in house prices in Australia. He said LVR rules would restrict the access to credit of young owners of small-to-medium businesses, given the banks typically lent to SMEs with security over houses.

…”The younger generation of business owners are far less likely to have a residential mortgage to support any business debt they need and they’re just going to get squeezed out of that market, the same way as they’ve been squeezed out of the housing market,” he said.

…Mr Auty [said] APRA had gone too far in trying to mitigate risk following the global financial crisis. They said measures were needed for banks to “better manage risk, not avoid it altogether”.

Advertisement

Errr, if they’re already squeezed out of housing then they’re already unable to get a business loan.

Let’s face it. Although the politico-housing complex won’t say it, the reason the current Sydney price boom is so upsetting everyone is that it’s building on an existing bubble. The bubble is driven by massive over-leverage in the Australian bank mortgage books via internal risk modeling that discounts capital reserving for home loans.

It strikes me that former “risk managers” that fail to acknowledge this basic truth are in no position to defend business lending. Sure, macroprudential may hit some SME lending but letting the current system run will hit it even more over the long run as the same risk-adjusted capital models ensure that banks prioritise mortgages above all else.

Advertisement

This is what is known as “partial analysis” in which a particular interest group is studied without reference to the broader changes a policy will bring. For instance, if macroprudential triggers a lower the dollar than otherwise then other parts of the economy benefit and innovation will be lifted in tradable sectors.

It may be that using one form of regulation to address the failings of another is far from ideal, but it’s better than running headlong into disaster.

About the author
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.