IMF humiliates Aussie macroprudential

By Leith van Onselen

The…ahem…shortsightedness of Glenn Stevens’ comments last year that macro-prudential controls on high risk mortgage lending were “dreaded” and the “latest fad” has, once again, been exposed with a new working paper from the International Monetary Fund (IMF) which evaluates evidence from 119 countries over the 2000-13 period and finds that macro-prudential policies are generally effective, although they tend to be more beneficial in developing nations:

We find that macroprudential policies are used more frequently in emerging economies, with especially foreign exchange related policies used more intensively. Borrower-based policies are used more in advanced countries. We find that policies are generally associated with reductions in the growth rate in credit, with a weaker association in more developed and more financially open economies, and can have some impact on growth in house prices… We do find evidence of some asymmetric impacts in that policies work better in the boom than in the bust phase of a financial cycle.

Taken together, the results suggest that macroprudential policies can have a significant effect on credit developments.

The growth of macro-prudential measures across both developed and developing economies is shown in the below IMF chart:

ScreenHunter_6766 Mar. 30 08.59

As to macro-prudential’s effectiveness, the IMF finds:

…a one standard deviation change in the MPI index, reduces credit growth by some 2.2 percentage points. This is a large effect, equivalent to about 1/4th the standard deviation in credit growth (9.04) for advanced economies. The economic effect is even larger for emerging markets…

The IMF working paper also finds that borrower-based measures, such as caps on loan-to-value ratios (LVRs) and debt-to-income rations, are generally found to be negatively related to credit growth. And while the impact is greater in developing (closed) economies, it remains significant in advanced economies as well:

…we find that caps on loan-to-value ratios (LTV_CAP), a borrower-based measure, are strongly associated in developing countries with lower overall credit growth, but also with less household credit in all countries. Debt to income (DTI) limits are important as well, especially for curtailing growth in household credit in both advanced and emerging markets…

Taken together, these results suggest that borrower-based measures have some impact for most type of countries, while foreign currency related measures are more effective for emerging markets. On the whole, this suggests that there appears to be scope for targeted macroprudential policies such as LTV and DTI ratios in advanced economies and foreign currency related policies in emerging markets. These are important findings especially given the at times adverse effects for overall financial and economic stability of real estate developments in advanced countries and of international capital flows for emerging markets.

The IMF’s results, of course, follow those from the Bank for International Settlements (BIS), which last week released a working paper of its own supporting macro-prudential measures.

Take note Capt Glenn and Wayne Byers. Your opposition to transparent macro-prudential controls is looking more foolish by the day.

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      • That’s certainly not the way that I see it. Perhaps it could be more forceful, but it’s certainly not insignificant

      • Oh sure Pete, it’s killing the market. However can Sydney survive on the back of a measly 20% pa growth.

      • Stewie Griffin

        “…although they tend to be more beneficial in developing nations”

        Well with a manufacturing base of 8% of GDP, a heavy reliance on commodity exports, massive foreign debt, a growing CAD, regulatory capture of key institutions and a lazy indolent political class, it seems to me that Australia perfectly fits the description of a developing nation.

      • +1 leith

        Pete, care to elaborate? LVR’s are way beyond 100% if you consider prices (mistakenly used term for values) are 50% above value.

  1. Your long-time middle-age neighbour, who has become quite jaded lately, asks for help. Having known him for so long, you know what might do the trick. You advise him to have lots and lots of sex with adequate protection. Elated at this idea, he goes on having indiscriminate sex but forgets about that little caveat. With so much activity, he now has a spring in his steps, his jadedness has gone down, he is now very optimistic. He becomes more and more attractive to all the sheilas in the neighbouhood, especially the younger ones, while other blokes don’t get any action. Satisfied, you brag about your advice at all barbeques and take out a victory lap. Inevitably, from so much indiscriminate action, eventually your neighbour contracts nasty infections and is soon onto his deathbed. You continue to tell everyone who cares to listen that this still is the only way to revitalisation.

    The story of those who were (and still are) calling for the rate cuts.

  2. Surely it is abundantly clear by now that Glenn Stevens and Wayne Byers don’t want to slow credit growth. Either because their jobs depend on allowing debt-driven growth to continue or because they are terrified of doing anything that could blow it all up.

    • Agreed. Who’s looking at credit growth anyway?
      There’s only 3 figures that count, i.e.
      GDP growth – who cares if it’s generated via increased debt or population growth
      Inflation – that’s dropping so we need ‘more’ credit growth not less
      Unemployment – that’s going in the wrong direction right now so again let’s grow that money supply..

    • +1 this is entirely facilitated by their doings and for GS, stated goals. The Aussie mugs have been all to happy to oblige.

  3. Sydney will do just fine, despite (or perhaps in part because of the growing value of Sydney real estate- wealth effect). Sydney is booming at the moment. With the state government intending to spend billions on infrastructure projects in the next years, this will continue. However, the rest of Australia will be in recession. What is occurring with the end of the mining boom (in WA and QLD) and the gutting of manufacturing in Victoria (and too a lesser extent SA), is a massive redistribution of wealth to Sydney.

    • Of course Sydney is booming it’s rentseeker central – all the ticket clipping for the debt speculation flows through, the super ticket clip, and the ticket clip on the actual residents as they get pulled deeper and deeper into the private debt housing Ponzi.

      The question will be can the rest of Australia see, let alone do anything, about the disease.

    • “However, the rest of Australia will be in recession. ”

      And then the banks will be in absolutely no trouble and still eager and willing to endlessly extend credit to Sydney investors.

    • Tian – true to a point…but not long term, if the rest of Australia goes into a full blown recession Sydney will be pulled in – to start with, how many businesses do you think exist in Sydney that would be hit hard?

      • Hi Andrew 1234.
        In my opinion negative growth in other capitals/States will result in people and businesses allocating their resources to (the more prosperous ) Sydney. Rule number 1: follow the money. Anecdotal I know, but I know of a number of people who have moved from WA to NSW in the past year, selling up in WA and moving to Sydney. The macroeconomic issue is the RBA will look at the whole of Australia, and decide to cut rates, which will continue to add growth fuel to the Sydney economy. The comparison between the NSW State government going on an infrastructure spend as opposed to austerity like non spending climate in QLD and Vic will also add to the disparity.

      • Anecdotal I know, but I know of a number of people who have moved from WA to NSW in the past year, selling up in WA and moving to Sydney.

        You men like those numbers of business and people that had moved to WA to take part in the mining boom?

        The macroeconomic issue is the RBA will look at the whole of Australia, and decide to cut rates, which will continue to add growth fuel to the Sydney economy.
        The Sydney economy is the ticket clipper of the rest of the economy. If the rest fails, Sydney eventually will as well and probably to a much greater extent. There is no silver bullet!

        The comparison between the NSW State government going on an infrastructure spend as opposed to austerity like non spending climate in QLD and Vic will also add to the disparity.

        You mean infrastructure recycling? This is actually a growth vehicle but in the face of the capex cliff is miniscule.

    • Yeah as I said true to a point – you are only looking at one side of it though – if we have a serious fallout in resources (which looks likely) it will flow through everything eventually…

      What people are anecdotally doing now might not be the case in two years (and I don’t doubt your anecdotal evidence actually sounds right to me(

  4. Stevens, Ellis and Lowe have had their go. They have had ten years.
    Their grand experiment in monetary policy has failed.
    This is their giant speculative unproductive mal-investment bubble.
    No more excuses or chances.
    Sack them. Move on.

    • When everything falls apart because of these RBA recalcitrants, and governments fall and Jaqui Lambie goes to the lower house to form her new government, these people could be looking at gaol time.
      That’s the sort of thing that happens when you trash your country…

      • Sounds fair to me! Jail, name through the mud, and liquidation of any personal wealth are very justified. What goes around comes around.

  5. mine-otour in a china shop

    Wonder how it feels to be an APRA exec to go these regular IMF, BIS and Basel junkets / meetings and have these papers put down in front of you? Byers even headed up the committee at the BIS looking at Banking supervision and reforms, before he earned his stripes to come back to APRA.

    All that taxpayer funded travel to give these groups a one finger salute and tell them everything is under control and Straya is different and global evidence does not apply here.

    APRA hates to tell banks what to do – it trusts them via its principles based model from the last decade. It controls the agenda with some tough talking whilst in the background regulates with discussion papers, guidelines, meetings and placing scrutiny on Boards. Why bother be part of these international groups who operate different regulatory regimes to us – we could save some $$$.

      • mine-otour in a china shop

        When the dog and APRA makes a big mess, it will be left to the owner / taxpayer to clean it up. The taxpayer shovel to clean up the mess that APRA makes, will be much more expensive though.

  6. “APRA… that’s a dog that won’t hunt…right?”

    and it has a brother called FIRB who has the same traits

  7. Remember when Stevens was ‘making room’ for the resources boom because all the other plebs who weren’t mining were leaners? Fun times. And those wonderful days where the AUD roared up through 90 and beyond and they didn’t even notice. When will this clown ever get it right and not just ride the coat tails of dumb luck?

    • Ha ha ha! Do I ever?! It’s why I’m here in the USA. Thanks, Glen!

      We’ll see who the leaners are in a couple of years time.

      In the meantime, I expect more reliance on dumb luck, with the emphasis on ‘dumb’. It’s the Australian way.

  8. Of course macroprudential might make the financial system less risky, but it won’t improve home ownership and affordability issues.

    It is the elasticity of housing supply that determines what proportion of people will be priced out of the housing market; the availability of credit merely determines how long will be spent saving a deposit, by those who are not priced out for life.

    Of course developing nations have 50% of their population trapped in informal housing and/or rural poverty because of the inelasticity of housing supply.

    It is disgraceful how much analysis is being done of “credit” without any attention being paid at all to whether land rent is rising or falling, and whether the credit expansion is related to an increase in land rent OR in home ownership, in which case the mortgage payments are merely substituting for rental payments.