Treasurer Wayne Swan, is trying to informally regulate the major banks’ pricing of home loans through his combination of jaw-boning, threats and “reforms” to ban some fees and help competitors. The Treasury Secretary, Ken Henry, thinks calls for the Government to regulate lending rates on particular bank products are “quite peculiar”.
Now, Henry appeared to be referring to calls for direct, legislated regulation of bank interest rates, which no one (other than Joe Hockey, momentarily) thinks is a good idea because, as Henry said today, the only certain outcome of any such regulatory intervention would be credit rationing, with some households and businesses finding it impossible to access credit on reasonable terms.
But, whether it is direct intervention or indirect, the objective of the interventionists is broadly the same – to force/coerce the banks into keeping home loan rates lower than they would otherwise do.
There are various reasons for describing Swan’s weekend package as peculiar (not the least of which is that it had measures in it which assist the majors and others that will damage their competitors) but Henry has pointed to another one. If Swan makes it less attractive for the majors (and others) to lend for housing by reducing the returns from mortgage lending, they will lend less or find a less transparent way of charging more.
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At the very least, the marginally creditworthy customer is likely to find it harder to borrow. Or, as Henry said, typically interventions in lending markets have “unsavoury distributional consequences.”
Henry described the calls for government intervention peculiar after noting that the governor of the Reserve Bank, Glenn Stevens, had publicly stated that the RBA board had taken into account, and will continue to take into account, changes in the pricing of lending products in its monetary policy decisions.
Swan has studiously ignored the repeated statements from the RBA that it did take the likelihood of above-cycle rate rises from the majors into account in its most recent rate rises and is comfortable that lending rates are where it wants them to be.
Implicit in that position is if the banks had been cowed by Swan into simply matching the official rate rises those rises themselves would have been bigger, or there would have been more of them. The end result would be roughly the same, only Swan would have to be blaming and threatening the RBA rather than the majors.
Henry, as Stevens has done, talked about the tensions for policy makers in the current environment created by the trade-off between ensuring the banking system is safe and stable while also stimulating competitive pressures.
The system is stable, albeit still with some vulnerability to any new outbreak of crisis in the global financial system as a result of its continuing, albeit diminished, need to access offshore wholesale debt markets. Henry noted that the banks will have to roll over on “cost competitive terms” about $130 billion in government-guaranteed debt between 2011 and 2014. It will also have to cope with the international regulatory response to the crisis, which will involve considerable costs.
The argument that has raged around the sector relates to how competitive it is and how competitive it should be. There is no argument that there are fewer competitors – the foreign bank and non-bank sectors that produced the biggest sources of competition to the majors pre-crisis have diminished to the point of irrelevance.
That doesn’t necessarily mean that there aren’t healthy levels of competition even if, as Stevens said recently, the focus of that completion has switched from lending rates to funding, particularly deposit funding. It just means that those with net savings, and there are more households with net savings than there are with net debt, are getting a better deal after a decade and a half where the emphasis was on borrowers.
Across their funding sources, the banks have experienced an increase in their borrowings costs. In effect that reflects a global re-pricing of risk than the banks themselves have passed on, to varying degrees, to the various sub-sets of their borrowers.
Henry says that, post-crisis, the price of credit has adjusted to better reflect fundamentals and therefore that some part of the re-pricing should be considered permanent. He also said there has “probably been a structural change in the relationship between bank funding costs and benchmarks such as the official cash rates.”
Despite those comments he then went on to talk about the banks’ net interest margins and how, having been driven down to 2.25% immediately ahead of the crisis, they had now risen to 2.5%. He said it was too early to judge whether the post-GFC widening was explained fully by a lessening of competition but it provided a case for close examination of the factors affecting competition.
It doesn’t provide much of a case. The availability of absurdly and unsustainably cheap short-term credit pre-crisis allowed the non-banks to drive down margins and credit quality in that pre-crisis period.
A rise of 25 basis points doesn’t, in that context and against the backdrop of a riskier global economy and a domestic economy where the uneven benefits of the resources boom and a strong dollar elevates and redistributes some risk, trigger any alarm bells.
The whole point of pricing for risk – and the recovery in bank net interest margins has been driven, not by home loan margins but by the re-pricing of their business loan books – is that the lender wants more profit as compensation for the perceived credit risk.
It is, perhaps, surprising that the banks haven’t increased their margins by more. They are holding a lot more capital and low-returning but higher quality liquidity than they were pre-crisis and, as Henry noted, credit growth – and therefore their volume and balance sheet growth – has slowed dramatically.
With the cycle of improvement in their bad and doubtful debt experience having nearly run its course, their profits and returns on equity will be under pressure – in the past they were able to offset declining margins with staggering levels of volume growth.
Henry noted that over the past 25 years growth in credit had “vastly exceeded” the growth in Australia’s GDP, with aggregate credit growth expanding from about 50% of GDP in the mid-1980s to around 150% of GDP in the late 2000s and annual credit growth averaging 15%, driven particularly by the demand for credit from the household sector.
Since the crisis growth in credit had been “a little sl ower” than GDP growth, largely due to the fall-off in growth in business credit but also because the growth in credit to households isn’t running at as big a margin over GDP growth as it had.
There would be plenty of policymakers, and economists and others who would see, particularly in the light of recent traumatic experiences elsewhere, a slowing of the rate of credit growth to something more directly related to GDP growth as a very positive development.
That makes it quite, well, peculiar, that the nation’s treasurer is obsessed with trying to organise more and cheaper credit even as his central banks tries to do the opposite.
This article first appeared on Business Spectator.