Aussie Regulators are Making It Up as They Go Along
Do you hear that?
The wails coming from the corner?
Don’t worry if you can’t.
They’ll get louder.
It’s our regulators. They’re slowly working out how to undo all the damage they’ve done…
But hey, the regulators were put in place to protect you, weren’t they?
How do you stop the banks from going broke?
Maybe they were hoping no one would notice.
Maybe they were doing that age-old dirty political trick. That is, trying to hide a little bit of bad news under other, bigger, badder news.
The thing is, there wasn’t any really big bad news this week to help them dump a story they didn’t want made public.
The key economic event from December last year was a rate increase from the US Federal Reserve.
While that is an important event to global markets…it’s not really something that holds the attention of Aussies for very long.
Yet, that’s when the Australian Prudential Regulation Authority (APRA) decided to drop the news.
APRA will no longer ‘force’ banks to keep interest-only loans to 30% of their mortgage books. Not only that, APRA will also scrap the 10% cap on investor lending growth.
Now, why would APRA do that?
Well at the time the Aussie banks had seized up. They’ve stopped lending.
The loan application processes are tougher, and banks have even reduced the amount they will lend.
It’s become a rather bleak situation.
So much so that at the time I wrote about the fact that the Reserve Bank of Australia (RBA) has had under-the-table chats with bank CEOs. I imagine the RBA has begged them to keep lending.
It’s not a rule, more of a guideline
Let’s just run through a little history here.
APRA’s 30% cap on interest-only loans was really only enforced in 2017. It had been around since 2014, but it wasn’t a hard-and-fast rule. Just a recommendation that APRA thought banks should stick to.
Having the 30% interest-only loan ‘cap’ made APRA’s oversight look credible…without it having to get all heavy-handed on the banks and slow lending activities.
As you can see though, the Big Four banks consistently ignored the cap…
Source: The Australian
But here’s the thing.
The complete backflip on enforcing the 30% cap on interest-only loans is absurd. All that tough talking about reigning in the lending machines is just that. Nothing but talk.
The cap that APRA was so happy to brag about enforcing in 2017 didn’t exist by January 2019.
More to the point, despite the ‘rules’ APRA introduced in 2014, it didn’t start ‘cracking’ down on the banks until March 2017.
Only to have the cap lifted 18 months later.
After making the announcement, APRA chairman Wayne Byres insisted that the March 2017 crackdown was temporary. That it was never intended to be lasting:
‘APRA’s lending benchmarks on investor and interest-only lending were always intended to be temporary. 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.’
This confused me.
Because I remember 2017 well.
I had a mortgage broker friend whose business was being crushed by the lending cap for investors and interest-only loans.
There was no talk of it being temporary. In fact, in APRA’s original statement (which you can find here), it all sounds very permeant.
Not only that, I find it almost impossible to believe that a banking system built on two decades of high-risk lending has ‘strengthened’ in the 18 months since the cap was enforced.
The removal of the cap is nothing more than a desperate attempt to keep credit running abundantly through the Aussie economy…and prop it up a little longer.
Third rate cut to come
In one move, APRA have wiped out any faith the public may have had in it.
It doesn’t ‘oversee’ our banks. Rather than hard-and-fast rules, APRA’s framework is like the reeds that bend in the wind.
In saying that, APRA is no worse than the other institutions that allowed our lending machines to flourish. Our own central bank played its part too.
Like all powerful bodies at the top of the pile, it was happy to let the good times roll — lest it disrupt the executive team’s bonuses.
Given that the 30% lending cap on interest-only loans was introduced in 2014, it had years to monitor it before it became a problem.
Then we have APRA, which just changes the rules to suit itself.
But here’s the thing.
These people aren’t idiots, unfortunately. It would make this story so much more palatable if they were.
It’s worse than that.
The money rule-makers are simply part of an exploitative attempt to see how much those credit machines can crank out before they blow…
They knew what they were doing. And they let it go on as long as possible.
And why wouldn’t they?
The RBA complimented the banks’ unrestrained lending and APRA’s toothless oversight by keeping rates stupidly low.
And thanks to the Banking Royal Commission, we know that it doesn’t matter who signed the loan, as long as the banks got to make the loan.
More importantly, both APRA and the RBA enabled this.
The on/off switch for interest-only loans. The ‘more growth, now less growth’ spin on investor mortgages. They set up the rules in play and changed them as they saw fit…for no other reason than to keep things running.
And we were all encouraged not to question it. Each month, we have been reassured by none other than our central bank.
For months, every single RBA monetary policy meeting was met with some sort of reassurance that everything was fine. Growth was on track. Progress — which they never actually defined — would be ‘gradual’.
The spin was, ‘It’s fine; nothing to see here, folks.’
Each pointless and repetitive monthly statement from the RBA was created with information drawn from APRA bank data.
These establishments nourished the growth of the rampant lending.
They supported it.
And they convinced the public everything was under control.
Yet, there was no control.
APRA knew the depths of the problems. And I’ll bet so did the RBA.
Our own central bank and our own banking regulator enabled the creation of the catastrophic debt-eroding wealth levels.
You want to know how this ends?
First, there was APRA’s backflip on the lending ‘rules’.
Next came the rate cuts.
We’ve already seen two this year. And the market reckons there’s an 80% chance the RBA will cut rates again to 0.75%.
As I explained yesterday, Aussies are being primed for a new credit boom.
And APRA’s actions and policies will contribute to that.
Until next time,