Ever hit the pedal with a new set of brakes and found they gripped harder and quicker than desirable?
The Australian Prudential Regulation Authority (APRA) has. It’s now hoping bank lending will accelerate to make up for it.
Last year, when housing was roaring, investors dominating the market thanks to tax incentives and banks throwing cheap money at them, APRA tried using new brakes to slow the lending frenzy.
It capped the proportion of banks’ new lending available to investors. That – and prices becoming rather silly in Sydney and Melbourne – slowed investor demand.
But APRA also pulled on the handbrake to reduce the proportion of interest-only loans banks had outstanding. The combination certainly slowed investor lending – slowed it nearly to a stop. That wasn’t the intention.
APRA started taking its foot off the investor loan growth benchmark in April. Nothing much happened.
So now it’s throwing the handbrake on interest-only loans out the window.
At the same time, the Reserve Bank is publicly warning banks shouldn’t tighten their credit standards any more and reportedly is having a quiet word with them about maybe loosening a touch.
Our regulators are learning to be careful about what they wish for.
By the nature of regulators, they are not putting their hands up to say: “Whoops, went a bit too far with that, timing wasn’t perfect. Sorry about the skid marks.”
Instead, APRA’s announcement implies everything has gone precisely according to plan.
“APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary,” APRA chairman Wayne Byres said.
“Both have now served their purpose of moderating higher-risk lending and supporting a gradual strengthening of lending standards across the industry over a number of years.”
Strictly speaking, APRA has never been concerned about the housing market per se, just the potential problem of the banks it supervises becoming over-exposed to risky lending.
Ditto the RBA, but as part of their roles as broader economic watchdogs, the regulators, along with the government, don’t want the availability of reasonable credit to become difficult.
There’s plenty of anecdotal evidence the banks have over-reacted to past excess and the Hayne royal commission’s blow torch.
As someone has said, rather than a financial check-up when applying for a loan, customers are being shocked to cop a fiscal colonoscopy.
The desire of regulators and the government to keep credit coming is why I’ve argued it is not realistic to expect a further tightening of credit when the royal commission reports in February.
The credit crunch has already happened.
The royal commission has demonstrated our bankers are not especially bright, clearly not such stars as to deserve the ridiculous amounts of money they have been showered with by incompetent boards.
The commission and shareholders voting at annual general meetings have indicated bank executives are both overpaid and paid in a structurally damaging way.
That will change.
In the meantime, it looks like the banks will need to be led by the hand to understand they should continue to go about the business of bankers, taking risks and making loans. They just need to do it with reasonable common sense and not be bastards.
It would be an advantageous time to be the first bank to make clear that it’s lending as should be normal again, to have the confidence to be professionals going about their business.
Regulators, government, media and the baying mob also have to understand that borrowers need to accept personal responsibility when taking a risk doesn’t come off. It’s not always the banks’ fault by any means.
Credit risk can never be entirely eliminated. It would be a folly to attempt to do so.
Adjusting to a more reasonable credit world takes time and there’s another key factor: investors have to see a price at which buying makes financial sense.
That’s been the biggest brake in the Sydney and Melbourne over the past six months – and there’s nothing APRA and the RBA can responsibly do about that.