The rate cut we all know is coming
Do you hear that?
The wails coming from the corner?
Don’t worry if you don’t.
They’ll get louder as the new year begins.
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 this week was the December 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, Aussie banks have 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 I recently 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 last year. 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 won’t even be in place next year.
It started ‘cracking’ down on the rules in March 2017. And then on Wednesday, we find out the cap will be lifted in January 2019.
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 confuses me. Because I remember last year 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.
The rate cut we all know is coming
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 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 royal banking 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, everything 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, we have APRA’s backflip on the lending ‘rules’.
Next, we get a rate cut.
The Reserve Bank of Australia will compliment APRA’s 180-degree turn. And it’ll start lowering the interest rate to get the lending going again.
2019 could be the most exciting year for central banks after all.
One more thing before I go…
That’s all from me today.
We are closing our office between Christmas and New Year’s Eve. Don’t worry — you’ll still hear from us though. I’ve selected five of my favourite articles to send to you until we return on 2 January.
Until then, have a Merry Christmas and a Happy New Year.
I look forward to writing to you next year.