RBA, RBA, RBA, oi, oi, oi!


Max Walsh is a considered commentator but I have to disagree with him today. He writes in the AFR:

Post GFC many central banks and prudential regulators have widened their macroprudential arsenals beyond the interest rate weapon of monetary policy (MoP). Macroprudential tools are not new, and they have had a mixed record in the past. They have, for example, been employed to limit loan-to-value (LTV) ratios and debt-to-income (DTI) ratios and sectoral capital requirements. LTV requirements can cap the size of a mortgage relative to the value of a property, effectively imposing a minimum down payment. DTI caps can be used to limit household debt accumulation.

…The Reserve Bank argues that the IMF’s narrow focus on household debt and housing booms is misconceived; that while debt and booms may be part of the problem they are not the totality.

Luci Ellis, who heads up the Reserve Bank’s Financial Stability Department, defines the goal of financial stability as furthering the welfare of society, which could be threatened by disruptions that are harmful to output and employment.

In a recent speech she said: “Property markets, asset prices, credit and the array of other variables we look at in financial stability circles are not objectives. They are information variables. They are useful, but we should not define our performance in terms of having control over these variables. What matters more are the risk of a crisis and the severity of the resulting effects on output.”

…But many central banks including some of the most illustrious, but not our Reserve, failed miserably in their prudential management leading up to the global financial crisis.

With respect, the Ellis speech was bureaucratic gobbledygook. And, for heaven’s sake, Max, the RBA (and APRA) also failed miserably in their prudential management leading up to the global financial crisis. That’s why the banks ended up with massive, unprecedented guarantees that were explicitly prohibited under the existing regulatory framework described by the Wallis Inquiry.

Just because we had the fiscal resources to make the bailout work does not mean the RBA (and APRA) succeeded. On the contrary, they were bailed out themselves by changing the rules.

Sure, it was the right thing to do and it prevented disaster but in terms of maintaining financial stability within the rules laid down by parliament it was an epic failure. Not recognising that simple fact is blocking the road to reform for the entire economy.

David Llewellyn-Smith
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  1. Also, the first act in the 21 Century Aussie credit boom peaked in 2004, the exact moment that the terms of trade started skyrocketing. Prudential regulators were very lucky that they never had a face the challenges of unwinding that first speculative frenzy. Those issues threatened to engulf the economy once more during the GFC, and without the government backstop, and more importantly a second wind surge in the terms of trade, it would have been much uglier. The export sector rescued us twice in the space of 5 years.

    Here we find ourselves with the Sydney property sector in its tried and true speculative boom, but with the terms of trade heading south fast and no rabbit left in the China hat. It is inane to laud the RBA and APRA for their regulatory nous when their true test is yet to come, and potentially above to arrive.

  2. I am no fan of Luci Ellis, or Max Walsh for that matter, but it is just wrong to say that Australian banks got guarantees because of their failures or regulatory failures.

    They got the guarantees because governments around world, starting with the Irish, gave open-ended guarantees to their banks. The government here had no choice after that.

    • That’s rubbish. They got guarantees because markets froze. Governments were always going to guarantee after that. Who started it is irrelevant.

      The banks’ over-exposed themselves to short-term financing, regulators let them do it, and when the piper came a calling they all changed the rules.

      It’s very simple and very clear.

    • Ronin8317MEMBER

      There were two government guarantees during the GFC : the guarantee on deposit, and the guarantee on bank wholesale funding. The first is forced onto Australia, the second is not necessary if the Australian banks didn’t borrow so much from oversea.

      • I am not an apologist for the RBA or Treasury. As I agreed in a post below, Ellis got it badly wrong in 2006. She continues to get it wrong.

        But there is a difference between getting wrong in real time what you should have got right and not being able to foresee the unforeseeable. Even those people who saw the US housing crisis coming didn’t see that it would crash the entire global financial system.

        Who in 2007 said that the Australian banks were taking an unacceptably big risk by funding themselves offshore?

  3. Luci Ellis talking about the US housing market in 2006.


    “The resulting expansion in both sides of the household balance sheet is an important development for policy-makers to monitor, but it is probably not of itself a cause of financial instability…

    Particularly in North American markets, simple ratios have given way to credit scoring and risk-based pricing, so that loan sizes and pricing are more closely tailored to individual borrowers’ circumstances. To the extent that this reduces the margin of safety for some borrowers who are now able to borrow more than the older practices would have implied, this might mean that more households are facing greater financial risks than previously.

    But overall, this easing of financial constraints is a reflection of their ability to repay and withstand those risks. Therefore it cannot be assumed that a shift away from the earlier lending practices based on rigid ratios implies that financial vulnerability has increased in any significant way…

    The most important lesson to draw from recent international experience is that a run-up in housing prices and debt need not be dangerous for the macroeconomy, was probably inevitable, and might even be desirable.”

      • Ellis will wear that little piece of analysis like a crown of thorns for the rest of her career.

      • Whatever makes anyone think that Luci Ellis’s career has taken any setback from that so far, and why would that change in the future?

        She has actually succeeded in sidelining far wiser people at the RBA and the RBA is virtually following her craziness, rather than those who are far more sensible.

      • “Failing up” is the new black in career progression.

        (verb, intransitive) to derive gain in spite of failure that would usually either preclude said gain or have adverse consequences.

        E.g. Even though Fred was the salesman who lost the big advertising account, he is failing up to a seat on the Board of Directors.

      • Mav, although whilst not commenting on Ellis specifically, this has long been the way in the PS. I could tell a tale or two of the rise of some in the WA PS. Not a pretty story, I shall refrain.