APRA makes the rules… only to break the rules

APRA makes the rules… only to break the rules

New day, same old leadership.

To be fair, I would have written that sentence no matter which of the two major political parties won the election over the weekend.

While they desperately try to appear different to each other, they tend to have the same problem: The people in the party are far more interested in themselves than the actual people they pretend to serve.

Nonetheless, it means our Prime Minister Scott Morrison gets to stay in Kirribilli for the next few years (or until the next leadership coup).

And what will this government’s focus be?

Ensuring absolutely nothing changes…

Markets rally on nothing changing

Apparently, something like $33 billion in value was added to the Australian stock market on Monday.

Although, I never liked that terminology — ‘adding value’. Talking about the market gaining or losing billions of dollars is often a clever little soundbite to push a storyline.

A much more effective method is to follow the percentage gains.

Take this from the ABC, for example:

The ASX 200 share index closed 1.7 per cent higher at 6,476 — its highest level since late-2007, when the global financial crisis was brewing, and just below its record high.[1]

See? Far more informative.

Sure, percentages aren’t as scary-sounding or as exciting as the word ‘billions’ is. But you get a far more accurate picture of what happened this way.

Why were the markets rallying? Simple. The financial sector led the way.

You see, bank and mortgage broking stocks were thrilled the Coalition government was still in charge.

As one analyst said, the finance sector rallied because we’d get more of the same ‘less restrictive’ banking policies.

In other words, there was a fear that a change in government would mean greater oversight of the Aussie banking sector.

But with the Liberal Party staying in power, it would mean more of the same loose lending, making the royal banking commission a thing of the past.

And, well, wouldn’t you know it…

The RBA doesn’t matter this week

Word on the street is that there’ll be a rate cut in June.

It’s rumoured the Reserve Bank of Australia (RBA) has been holding off until after the election, as a rate cut is an admission that the economy isn’t doing so well.

This wouldn’t have worked in favour of the Liberals’ political campaign, as the party kept promoting Australia’s supposedly strong economy.

The problem with the above analysis, though, is that the RBA is meant to be apolitical.

And I’m not entirely convinced that the RBA would hold off on a rate cut just because of an election. If the RBA does cut rates in June, then we can question its impartiality.

For now, I suspect a rate cut will come in July, when the RBA has second-quarter gross domestic product (GDP) data on hand.

More to the point, the RBA may not need to do anything in June, as one of Australia’s regulators is doing something on its behalf…

‘You are remembered for the rules you break’

Enter the Australian Prudential Regulation Authority.

You’ve heard of it, I’m sure.

APRA sets the rules for the Aussie banks to follow.

Although sometimes, the rules are more like guidelines.

For example, in 2014, APRA set a ‘rule’ that banks couldn’t allocate more than 30% in loans to interest-only lending.

By 2017, however, all four big banks had close to 40% of their mortgage books exposed to interest-only loans.

APRA knew all of this, too.  

For three years, APRA ignored the banks ignoring the rules.

It was only in mid-2017 — with the whiff of a royal banking commission in the air — that APRA decided to ‘enforce’ the rule.

By ignoring its own rules, APRA allowed interest-only loans to hit nearly $400 billion.

And today, APRA has decided to once again change the rules.

This morning — with a Liberal government safe at hand — the banking regulator has said it will scrap the 7.25% benchmark rate banks must apply to home loan applications (to ensure borrowers can pay their loans if the rate was to get that high).

However, once again, this ‘scrapping’ doesn’t really mean much.

You see, APRA introduced this minimum test back in 2014, but it was largly ignored by banks. And again, APRA ignored the banks ignoring them.

Instead, banks added their own loan buffer of 2-3% over the cost of funds. It was only when property prices began to fall in mid-2017 — and banks realised their exposure to falling property prices — that the banks knuckled down and applied the 7.25% benchmark rate.

Then this morning, APRA announced the ‘benchmark’ is past its use-by date.

How can this be so, when it was hardly used?

The point is, APRA’s tendency to change the rules is meaningless when the rules were barely followed in the first place.

But this sudden change of heart gives you a very strong indication of what matters most to the government right now.

And that is, nothing can change.

And I mean nothing.

Everything must stay exactly the same, and the government will do everything it can to keep it that way.

And by ‘same’, I mean Aussie property prices can’t fall further. If they tumble much further, the debt loads would rip open the banks and destroy the consumption part of the economy.

Right now, the most important thing to our government — and the associated regulatory bodies — is ensuring that banks can lend to keep everything as it is.

Everything must be done to support the Aussie house price bubble.

That means regulatory bodies will change the rules to ensure banks feel they can lend.

Our own government is wading in, offering to put down a house deposit for first homebuyers. But how long until this scheme is extended to all potential buyers?

The point is, from here on in, powerful people and organisations are going to do everything they can to make sure nothing changes.

That may mean changing the rules. That may mean breaking them.

To borrow a phrase from General Douglas MacArthur, ‘You are remembered for the rules you break.’

Some dangerous precedents are about to be set.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia