Time For Some Straight Talk On Credit Card Rates

The ANZ move to cut rates on some of its cards will stimulate more discussion on the economics of the credit card business. It may appear a bold move, but we are not so sure.

Actually all the the various bank and ABA initiatives are not necessarily going to help to rebuild trust in the banks. Like a running sore, the ongoing exposure may well reinforce current negative consumer perceptions. A point event like a specific review might actually draw the poison more effectively!  And yes, there are major issues to address.

But, today we look at credit card economics. To do this we use the data provided by the RBA.  They show the number of card accounts (not the same as card numbers because some accounts will have multiple cards on them) has been growing, to approach 16.7 million accounts. The number of transactions on these accounts are also growing, with 241m transactions to December 2016.

The average value of a transaction has remained relatively static, with the average purchase around $120 and the average cash withdrawal around $380. But significantly the proportion of account balances which are accruing interest is reducing, with around 40% of accounts being cleared off each month. Households who can clear their cards should do so to avoid interest costs.

We see the monthly flows of new transactions and repayment match quite closely.

The 60% of balances which are revolving incur interest costs. The data shows despite cuts to the RBA cash rate, rates on both low rate and standard rate cards remain high, and indeed, some low rate cards have moved up recently. As a result the average interest margin between the cash rate and the charged rate is higher than it has ever been, on average close to 20%.  This puts the ANZ 2% cut on some cards into perspective!

So, now we know the proportion of cards which are revolving, and the margin, we can estimate the real net cost to the average revolving card holder. We estimate the typical account will incur a monthly interest charge of $57 each month they revolve, compared with $10 in 2003. In fact we see a stable cost until 2008, since when it has climbed substantially.  This is worth about $80m a month to the banks at the current margins.

To broaden the analysis, banks have also been slugging households with higher credit card fees. Again the RBA says, fees rose 6.6% in 2015 (last year of available data) and they took $1.5 billion in card fees in that year. In the past four years, card fees have risen significantly faster than inflation.

Finally, overall personal credit growth has fallen in recent times, as mortgage borrowing roar ahead. This is consistent with our observation that more households are repaying their cards each month.

Later we will look at the broader economics of cards, taking account of loyalty schemes and merchant fees.  Meantime you can read our earlier analysis of credit card economics by segment. But from a margin view, 2% is hardly a generous concession.

Baby Boomers digging into retirement savings to help their kids buy houses

From StartsAt60.

We’ve all heard stories about some Baby Boomer parents helping their kids out to buy their first home.

But as a new report, released by Digital Finance Analytics, has revealed, it’s becoming a growing trend across the country.

The report shows a growing number of Baby Boomer parents are giving their adult children money a leg up to get into the property market.

In fact, 54% of first home buyers who entered the property market in the last quarter of 2016 had financial help from their parents.

According to the report, in the last quarter of last year, the average amount given by parents to help their children buy property was $85,000.

Digital Finance Analytics principal Martin North said many Baby Boomer parents were bringing forward their children’s inheritance, using rising equity in their property to fund their kids first home deposit.

“Some are making a loan, others a gift,” he told Starts at 60.

“This is clearly eroding savings and equity for retirement. It’s replacing guarantees.”

While many parents are more than happy to give their children the money, Mr North said it could create some issues for parents down the track – particularly at retirement age.

“If it’s a gift, then the capital is gone. If it’s a loan, this can lead to difficulty later, especially if the terms are not clear, or the kids decide not to repay,” he said.

“Given that many Baby Boomers will not have sufficient super to funder their longer than expected retirement, this could put more pressure on the pension budget and create hardship for some in the future.

“I’m not sure many really understand the potential implications, but they also want to help their kids.”

This chart shows the ages at which parents are giving money to their kids. Source: Digital Finance Analytics

This chart shows the ages at which parents are giving money to their kids. Source: Digital Finance Analytics

The report found that parents aged between 55 and 60 were most likely to give their kids money for a home deposit, followed by those aged between 60 and 65.

Interestingly, that number drops once parents retire after the age of 65.

The children receiving the money are aged mostly between 30 and 35 (41.2%) and 35 and 40 (33.6%).

So, what do the Baby Boomers think of the report’s finding?

Well, we put the age old question of “would you give money to your children to help them buy their first home?” to Starts at 60 readers and the response was varied.

Several SAS readers shared stories of how they gave money to their children.

Joanne Tonkin-Bride said she gave more than double the average of $85k to each of her children.

“My ex was a very good provider and therefore were fortunate enough to be able to do so,” she said.

“l would rather see my children happy now, than after l’m dead and gone.”

Fellow SAS reader Lorrain Lidston also provided for her daughters’ home deposits.

“When our parents passed, we sold their property and split it with our two girls, having 1/3 each,” she said.

“Better they enjoy it now than when we are gone.”

Some other readers loaned money to their children, while others acted as guarantors.

Unfortunately, as some readers pointed, many Baby Boomers can’t afford to give their kids help.

Many of you wish you could help them, but as you would know, a lot of Boomers are struggling.

“I wish we had been able to have that opportunity, we have been frugal all our lives but did not have the money to put into Super, gave them a private school education instead,” SAS reader Pamela Sanders said.

And then there are some Baby Boomers who pointed out that their parents didn’t help them out, and that their kids need to work hard and save for themselves.

“I had to work for my first house. No one helped me.” SAS reader Ruth Hourigan said.

“I personally believe that is a major problem with todays generation. They can’t be bothered doing it for themselves.”

You might be wondering what is driving the trend in Baby Boomers helping their kids buy their first home?

Well, it all comes down to the very topical issue of housing affordability.

Mr North said that housing affordability was “shot” for purchasers without parental help, and he’s pointing the finger at high house prices, banks demanding larger deposits and a reduction in first home buyer grants.

“With parental help they may be able to buy (either for OO or investment purposes), but this does not help affordability in the longer term as it will continue to push prices higher, alongside ongoing demand from investors,” he said.

“Regulators may be pressing the banks to curtail lending growth a bit, but demand, especially down the east coast is rabid.

“Savers of course get lower returns on deposits which makes savings for the house deposit more challenging without a circuit breaker like the ‘Bank of Mum and Dad’.”

Interestingly, another report released this week shows the majority of Australians across all ages believe the Great Australian Dream is becoming harder to achieve.

The Evolving Great Australian Dream report, released by Mortgage Choice, has found an increasing number of us don’t believe the Great Australian Dream of  “a free-standing house on a quarter-acre block in the suburbs” is achievable.

The report found 85% of Australians over the age of 50 don’t believe the Great Australian Dream is achievable, compared to 91.6% of Australians under the age of 30.

Mortgage Choice CEO John Flavell said Australians struggling to get a foot on the property ladder needed help to achieve their dream of home ownership.

To date, we have heard a myriad of suggestions from both sides of parliament in relation to what should be done to address the issue of housing affordability,” he said.

Home ownership should be achievable for all Australians, and as a nation, we should do what it takes to make that a reality.”

And the trend of housing affordability is only set to get worse, with more first home buyers set to rely on their parents to make home ownership a reality.

Mr North pointed to the UK, where more than 70% of first home buyers were getting help from the “Bank of Mum and Dad”.

“For as long as housing affordability is out of kilter with flat or falling incomes, many won’t be able to enter the market without help,” he said.

“My point is these intergeneration issues are not well understood. There are risks for both parties, and creates an additional divide – those wanting to buy with affluent parent can, those without this benefit are excluded.It is a symptom of a failed housing market. And failed Government policy to say nothing of poor RBA judgement.”

ANZ’s new credit card rate isn’t making the cut, say critics

From The NewDaily.

When you’re doing well, a little generosity is appreciated – except if it is too little, which is what consumer advocates and MPs are saying about ANZ’s surprise announcement that it will be trimming interest rates on its credit cards as of February 28.

And make no mistake, ANZ is doing very well indeed.

Last month it announced that profits for the most recent quarter had hit $2 billion, an increase of 31 per cent on the same period last year. More than that, ANZ Banking Group chief Shayne Elliott is upbeat about the burden of bad debts on his outfit’s books and recently scaled back estimates of that red-ink liability.

So given the ANZ’s strong profit result, they can afford to give users of its credit cards a break, right?

Absolutely, says CHOICE’s Tom Godfrey, who doesn’t see the reductions as anything but a very small bone indeed.

Those reductions should have been much larger, Mr Godfrey said, casting the cuts as a case of too little and too late.

“It’s an attempt by ANZ to try and take the heat off themselves and the other banks to show they’re responding to community concerns,” he said, adding that “the big four banks are just not competitive”.

Mr Godfrey noted that the best interest rates – those offered by the credit unions – are under 10 per cent, and he wondered where ANZ’s rival banks found the gall to charge “toxic interest rates” of “around 18 or 19 per cent or higher”. The best credit card rates available in Australia can be as low as 8.9 per cent.

More than 500,000 existing ANZ Low Rate accounts will benefit from the new rates, with the bank estimating that a typical consumer stands to save about $150 a year.

MPs take the credit

The government has praised the bank for the move, with Liberal MP Scott Buchholz saying ANZ has shown “commercial courage” in lowering its rates.

Malcolm Turnbull also claimed credit. Despite his government’s reluctance to conduct a Royal Commission into the banking sector, he said the newly-formed economics committee, before which the bank CEOs appear, had now provided real results.

“I am bringing the banks regularly before the house economics committee and they are being held to account for their actions and you are seeing real results,” Mr Turnbull said on Sunday.

Neither Mr Godfrey’s criticism nor South Australian Senator Nick Xenophon’s faint praise for the move ruffled the head of ANZ’s retail and commercial unit, Fred Ohlsson, who crowed that the reductions mean customers will have “the best rate available from any of the major banks or any of the regional banks owned by the majors”.

ANZ estimates that a typical consumer stands to save about $150 a year under the new rates.

And that’s the whole point, according to Senator Xenophon, who scoffed that ANZ customers have good reason to be even more miserly with their gratitude than the bank has been with its rate cuts.

“The gap between the official cash rate and credit card rates has never been higher,” he said.

“We really need to look at some form of either greater market competition, or the banks need to really explain themselves in gouging consumers in this way,” said Senator Xenophon, who has been a strong backer of Labor leader Bill Shorten’s call for a royal commission into the banking industry.

Mr Buchholz cited the grilling late last year of bank executives who were dragged before a parliamentary inquiry as a prime factor motivating Sunday’s announcement.

“We will have the banks appearing in the next fortnight in Canberra, along with the Australian Banking Association, where I will continue to take a similar line of questioning with those banks that haven’t taken the commercial choice to shift their interest rates yet.”

ANZ To Cut Some Credit Card Rates

ANZ has today announced it will reduce purchase interest rates on two credit cards by up to 2.00%pa, which is the lowest these rates have been for customers since 2003.

Effective Thursday 23 February, ANZ will reduce the purchase rate on its Low Rate Platinum card by 2.00%pa to 11.49%pa, and its Low Rate Classic card by 1.00%pa to 12.49%pa.

More than 500,000 existing ANZ Low Rate accounts will benefit from the new rates with the majority of those customers who pay interest every month to save about $150 a year.

Announcing the changes, Group Executive Australia Fred Ohlsson said: “Our customers with Low Rate accounts are typically middle income Australians who predominantly use their credit card for everyday household purchases, such as groceries.

“We’ve listened to customer feedback about credit card rates and decided our Low Rate customers would benefit most from a rate reduction as they are more likely to have ongoing debt from month to month. These changes mean they will have the best rate available from any of the major banks or any of the regional banks owned by the majors,” Mr Ohlsson said.

ANZ’s Low Rate Classic card also offers the lowest annual fee of the major banks for similar cards at $58, and has a minimum credit limit of $1000 making it accessible to a wide range of customers.

The Low Rate Platinum card has an annual fee of $99 and a minimum credit limit of $6000. It also comes with a range of insurances, including overseas travel and medical, and up to nine additional card holders at no extra cost. Both cards feature up to 55 interest free days on purchases.

Key crossbench senator Nick Xenophon welcomed the announcement, but said the banks needed to do more to address the cost of credit cards.

“The gap between the official cash rate and credit card rates has never been higher and I think that we really need to look at some form of either greater market competition, or the banks need to really explain themselves in gouging consumers in this way,” he told ABC TV on Sunday.

Macroprudential – How To Do It Right

Brilliant speech from Alex Brazier UK MPC member on macroprudential “How to: MACROPRU. 5 principles for macroprudential policy“.

He argues that whilst macroprudential policy regimes are the child of the financial crisis and is now part of the framework of economic policy in the UK, if you ask ten economists what precisely macroprudential policy is, you’re likely to get ten different answers. He presents five guiding principles.

There are some highly relevant points here, which I believe the RBA and APRA must take on board. I summarise the main points in his speech, but I recommend reading the whole thing: This is genuinely important! In particular, note the limitation on relying on lifting bank capital alone.

First, macroprudential policy may seem to be about regulating finance and the financial system but its ultimate objective the real economy. In a crisis, the financial system may be impacted by events in the economy – for example credit dries up, lenders are not matched with borrowers. Risks can no longer be shared. Companies and households must protect themselves. And in the limit, payments and transactions can’t take place. Economic activity grinds to a halt. These are the amplifiers that turn downturns into disasters; disasters that in the past have cost around 75% of GDP: £21,000 for every person in this country. So the job of macroprudential policy is to protect the real economy from the financial system, by protecting the financial system from the real economy. It is to ensure the system has the capacity to absorb bad economic news, so it doesn’t unduly amplify it.

Second, the calibration of macroprudential should address scenarios, not try to predict the future but look at “well, what if they do; how bad could it be?” In 2007, he says it was a failure to apply economics to the right question. There was too much reliance on recent historical precedent; on this time being different. And, even more dangerously, they relied on market measures of risk; indicators that often point to risks being at their lowest when risks are actually at their highest.

The re-focussing of economic research since the crisis has supported us in that. It has established, for example, how far: Recessions that follow credit booms are typically deeper and longer-lasting than others; Over-indebted borrowers contract aggregate demand as they deleverage; While they have high levels of debt, households are vulnerable to the unexpected. They cut back spending more sharply as incomes and house prices fall, amplifying any downturn; Distressed sales of homes drive house prices down; Reliance on foreign capital inflows can expose the economy to global risks; And credit booms overseas can translate to crises at home.

When all appears bright – as real estate prices rise, credit flows, foreign capital inflows increase, and the last thing on people’s minds is a downturn – our stress scenarios get tougher.

Third, feedback loops within the system mean that the entities in the system can be individually resilient, but still collectively overwhelmed by the stress scenario.

These are the feedback loops that helped to turn around $300 bn of subprime mortgage-related losses into well over $2.5 trillion of potential write-downs in the global banking sector within a year. Loops created by firesales of assets into illiquid markets, driving down market prices, forcing others to mark down the value of their holdings. This type of loop will be most aggressive when the fire-seller is funded through short-term debt. As asset prices fall, there is the threat of needing to repay that debt. But even financial companies that are completely safe in their own right, with little leverage, and making no promise that investors will get their money back, can contribute to these loops.

The rapid growth of open-ended investment funds, offering the opportunity to invest in less liquid securities but still to redeem the investment at short notice, has been a sea change in the financial system since the crisis. Assets under management in these funds now account for about 13% of global financial assets. It raises a question about whether end investors, under an ‘illusion of liquidity’ created by the offer of short-notice redemption, are holding more relatively illiquid assets. That matters. This investor behaviour en masse has the potential to create a feedback loop, with falling prices prompting redemptions, driving asset sales and further falls in prices.

And in a few cases, that loop can be reinforced by advantages to redeeming your investment first. Macroprudential policy must move – and is moving – beyond the core banking system.

Fourth, prevention is better than cure.

Having calibrated the economic stress and applied it to the system, it’s a question of building the necessary resilience into it. The results have been transformative. A system that could absorb losses of only 4% of (risk weighted) assets before the crisis now has equity of 13.5% and is on track to have overall loss absorbing capacity of around 28%. Our stress tests show that it could absorb a synchronised recession as deep as the financial crisis.

And if signals emerge that what could happen to the economy is getting worse, or the feedback loops in the system that would be set in motion are strengthening, we will go further.

But bank capital is not always the best tool to use to strengthen the system and is almost certainly not best used in isolation.

We have applied that principle in the mortgage market. Alongside capitalising banks to withstand a deep downturn in the housing market, we have put guards in place against looser lending standards: A limit on mortgage lending at high loan-to-income ratios; And a requirement to test that borrowers can still afford their loan repayments if interest rates rise.

These measures guard against lending standards that make the economy more risky; that make what could happen even worse. Debt overhangs – induced by looser lending standards – drag the economy down when corrected. And before they are, high levels of debt make consumer spending more susceptible to the unexpected. So they guard against lenders being exposed to both the direct risk of riskier individual loans, and the indirect risk of a more fragile economy. This multiplicity of effects means there is uncertainty about precisely how much bank capital would be needed to truly ensure bank resilience as underwriting standards loosen.

A diversified policy is also more comprehensive. It guards against regulatory arbitrage; of lending moving to foreign banks or non-bank parts of the financial system. And by reducing the risk of debt overhangs and high levels of debt, it makes the economy more stable too.

Fifth, It is that fortune favours the bold.

The Financial Policy Committee needs to match its judgements that what could happen has got worse with action to make the system more resilient. Why will that take boldness? Our actions will stop the financial system doing something it might otherwise have chosen to do in its own private interest – there will be opposition. The need to build resilience will often arise when private agents believe the risks are at their lowest. And if we are successful in ensuring the system is resilient, there will be no way of showing the benefits of our actions. We will appear to have been tilting at windmills.

As the memory of the financial crisis fades in the public conscience, making the case for our actions will get harder. Fortunately, we are bolstered by a statutory duty to act and powers to act with. And whether on building bank capital or establishing guards against looser lending standards, we have been willing to act. Just as building resilience takes guts, so too does allowing the strength we’ve put into the system to be drawn on when ‘what could happen’ threatens to become reality. Macroprudential policy must be fully countercyclical; not only tightening as risks build, but also loosening as downturn threatens. Without the confidence that we will do that, expectations of economic downturn will prompt the financial system to become risk averse; to hoard capital; to de-risk; to rein in. To create the very amplifying effects on the real economy we are trying to avoid.

A truly countercyclical approach means banks, for example, know their capital buffers can be depleted as they take impairments; Households can be confident that our rules won’t choke off the refinancing of their mortgage. And insurance companies know their solvency won’t be judged at prices in highly illiquid markets. We must be just as bold in loosening requirements when the economy turns down as we are in tightening them in the upswings. Boldness in the upswing to strengthen the system creates the space to be bold in the downturn and allow that strength to be tested and drawn on. Macroprudential fortune favours the bold.

 

Have Mortgage Broker Share and Commissions Peaked?

We have updated our mortgage industry models to take account of the latest loan volume, channel and commission data to January 2017.

New loans have continue to flow via the mortgage broker channel, thanks to increased demand for mortgages, and households appreciating the mortgage broker value proposition.  Our surveys show portfolio investors, solo investors, refinancers and first time buyers are all quite willing to use third party assistance to get a mortgage. Especially, when pricing changes are in the works, and rates are volatile.

We estimate that around half of all mortgages written in recent months have been originated via the broker channel. However, we also now believe that this has reached a peak, thanks to CBA’s recent comments that it will favour its branch channels, and some investment loans will only be available via its proprietary network. As one of the industry’s largest players, this will impact. Indeed, their new loan volume via the broker channel slipped to 43% from 46% six months back despite strong loan growth. Their portfolio is 42% broker originated.  We have therefore adjusted our market model to reflect a small fall in volumes thought 2017.

At the moment new loan broker commission pools are looking very healthy, with new business earning estimated up-front commissions of more than $100m a month, and equating to more than $1.1+ bn a year. This is helped by a combination of larger loans and volumes.

However, we suspect that transaction volumes will slow now that interest rates are being raised on investment loans in particular, borrowers appear more uncertain about the impact interest rate rises, and there is of course talk of changes to the rules for investment property, which may spook the horses. Given the tail-off in owner occupied loans, we suggest that we may be approach a “peak” of mortgage broker volumes and commission pools.

Brokers of course will benefit from trails which are paid on existing loans in subsequent years, so many will have now built up a nice little nest egg, so it is by no means all doom and gloom.  But “peak commission” may just have passed.

Are we all macroprudentialists now?

Klaas Knot, President of the Netherlands Bank, spoke at a seminar  “Tomorrow’s banking and how central banks have developed in last 15 Years”. He discussed the role of macroprudential and it’s relationship to monetary policy.

I would like to focus on the increased importance of macroprudential policy for central banks, and elaborate on some of Pentti’s main insights. I want to raise three main points.

My first point is that financial crises have always happened and will always happen. And they do not result from some exogenous, extreme event. Rather, to use Pentti’s words, financial crises can “be interpreted as an extreme manifestation of the financial cycle phenomenon”. By financial cycle we understand systematic patterns over time in the financial system that can have important macroeconomic consequences.

Typically, financial crises are preceded by booms characterized by a combination of intensified financial innovation, robust and widespread appetite for risk, and a favorable economic environment. This favorable environment could for example reflect new growth impulses from technological innovation, international trade, and mobile and volatile international capital flows.

These patterns are indeed not specific to the Global Financial crisis, nor – if we look back in time – to the Great Depression. In fact, the first truly global financial crisis in modern history – the South Sea Bubble of 1720 – originated in England, France and the Netherlands. All key ingredients of an extreme financial cycle gone wrong can be found here. (The famous tulipmania that hit the Dutch Republic in 1636-37 shared some but not all of these elements, and its dynamics can be compared to the dotcom bubble rather than a global financial crisis.)

The burst of the South Sea Bubble followed a period of strong economic growth. The discovery of the economic potential of the New World had led to a shift in global trade towards the triangle that brought manufactured goods to Africa, Africans as slaves to the New World, and commodities to Europe.

There had been rapid innovation in financial engineering, spurred by some form of deregulation. This allowed greater risk sharing and supported exuberance in the financial sector. “Shadow banking” (the English insurance companies and international investors) played a pivotal role. As liquidity stress morphed into solvency problems, the bubble burst with a dramatic international stock market crash.

You can see how the mechanics of this crisis do not differ much from those of the recent Great Financial Crisis, and all other crises traced through history by Charles Kindleberger.

My second point is that there is a consensus that macroprudential policy is an essential toolkit but its effects and transmission channels are still not fully understood. Since the 1930s, policymakers have used prudential means to enhance system-wide financial stability, with a view to limiting macroeconomic costs from financial distress. Some measures taken in the 1930s, 1950s and 1960s to support the domestic financial system and to influence the supply of credit have been viewed as macroprudential tools. Still, when Andrew Crockett pleaded for a macro perspective on prudential policy in 2000, the idea was controversial.

It took the Great Financial Crisis to forge a consensus on the importance of macroprudential policy. As Pentti put it, “Macroprudential policy is needed in addition to other economic policies. It is very important that authorities have also macroprudential instruments available. Now, after the Great Financial Crisis, we have instruments and framework in place.”

But in his usual sharpness Pentti also highlighted the challenges to using macroprudential tools: “the effects of the said instruments are uncertain and second, processes for their usage are unnecessarily complicated. These points are intertwined.”

My third point – and here I would like to elaborate a bit – is that we should not look at macroprudential policy and its effectiveness in isolation. As Pentti argued in a speech last year, it is important to coordinate macroprudential policy and monetary policy. Let me elaborate. The effectiveness of macroprudential policy depends importantly on its interaction with monetary policy. In particular, it hinges on the “side effects” that one policy has on the objectives of the other.

On the one hand, monetary policy can thwart the intentions of macroprudential policy. We all agree that the monetary policy stance affects risk taking of the financial system as a whole.

While macroprudential instruments typically target specific vulnerabilities, monetary policy affects the cost of finance for all financial institutions – including the shadow banking sector. As such, in the words of Jeremy Stein, it “gets in all of the cracks and may reach into corners of the market that supervision and regulation cannot”. This is most evident in a crisis situation, such as the one we are still witnessing in the euro area. Standard and non-standard monetary policies that provide ample liquidity may avoid a collapse of the banking sector. But they can come at the expense of reduced incentives for banks to recapitalize and restructure. They may actually promote the evergreening of  nonperforming loans and regulatory forbearance.

It is argued that targeted macroprudential policies can offset these side effects. But I do not side with this Panglossian view and am afraid that there are limits to what macroprudential tools can achieve in practice. On the other hand, macroprudential policy can thwart the intentions of monetary policy.

Changes in (micro and macro) prudential policy will affect banks’ risk-taking, their financing conditions and balance sheet composition. They will therefore have an impact on the real economy and on price stability. The fact that the ongoing unprecedented monetary policy stimulus does not translate into rapid credit growth in the euro area might then not imply that monetary authorities are not doing enough. Rather, banks are reacting to stricter regulatory rules that have been introduced in the wake of the global financial crisis in an attempt to make the financial system more resilient. These regulatory changes therefore weaken the pass-through of monetary policy measures to the supply of bank credit and, ultimately, to aggregate demand and inflation.

Let me conclude. The claim that “we are all macroprudentialists now” seems to suggest that macroprudential policy has become fashionable.10 Are we then all macroprudentialists? In the spirit of Pentti’s thinking my answer is: Yes – as long as we stay eclectic, pragmatic and flexible. And we take the interactions of monetary and macroprudential policies into account, and coordinate the two policies.

 

CBA targets third party origination in investment lending crackdown

From Australian Broker.

The recent tightening of investment lending practices by the Commonwealth Bank of Australia only apply to those loans coming through the third party channel, it has been revealed.

Last week, it was reported that the CBA had halted any new refinance applications for standalone mortgages.

A notice sent to the bank’s broker network stated: “To ensure we continue to meet our commitments, from Monday 13th February we will be suspending the acceptance of new refinance applications for Investment Home Loans, until further notice.

“Applications which include both Investor and Owner Occupier loans are not impacted.”

While the notice appeared to apply to all refinance investor loans, the major bank has now told Australian Broker that these changes apply solely to intermediary-sourced loans. Borrowers will still be able to access refinance investor loans via CBA’s retail branches.

“We’re committed to meeting our responsible lending and regulatory obligations and to ensure we continue to meet this commitment, we are unable to accept new refinance applications for Investment Home Loans from our broker partners,” a CBA spokesperson told Australian Broker on Wednesday.

“The vast majority of our single property investment home loan refinances come to us through our broker partners so the decision was made to address this in the first instance to ensure we continue to meet our regulatory requirements.”

“We constantly review our products, policies and processes to ensure we’re meeting our customers’ financial needs,” the spokesperson said.

This decision comes soon after CBA subsidiary Bankwest announced it too would halt all new applications from customers looking to refinance their standalone investment lending.

ANZ, Westpac and NAB have thus far made no changes to their investment lending policies in either the third party or retail channels

Suncorp wealth arm placed on ‘negative watch’

From InvestorDaily.

Suncorp’s life insurance and superannuation division has been placed on ‘negative watch’ by S&P after the bank revealed it is considering “strategic alternatives” for the business, including divestment.

In a statement released yesterday, S&P Global Ratings said the strategic importance of Suncorp Life and Superannuation Limited (SLSL) has “weakened” following statements made in Suncorp’s annual result.

In last week’s annual result announcement, Suncorp revealed it is implementing an “optimisation program” for its Australian life insurance business as well as “exploring strategic alternatives”.

In response, S&P has lowered its financial strength and issuer credit ratings on SLSL to ‘A’ from ‘A+’, which it said “reflects a reduced level of uplift in the rating from group support”.

S&P said it has also placed Asteron Life’s ‘A+’ rating on watch with “negative implications, reflecting uncertainty as to the level of integration of the entity with the group”.

The research house said Asteron Life is now only “strategically important” for Suncorp – a downgrade from its previous “core status”.

“This downgrade follows Suncorp’s announcement that it has undertaken a strategic review of its Australian life insurance operations, which includes potential divestment of the operations. As such, we no longer consider SLSL as being highly unlikely to be sold,” said S&P.

“The weak operating performance of the life operations relative to group expectations has  triggered the group’s strategic review. This weaker performance also contributes to our assessment of slightly lower group support for SLSL compared with that for Asteron Life,” said S&P.

“We expect the continued strength in [Asteron Life]’s inforce premiums, operating experience and emergence of planned profit margins to support the financial contribution of the group’s New Zealand life operations, in contrast to SLSL’s weaker operating performance.”

Households warned to expect more out-of-cycle rate rises

From The NewDaily.

A figure deep in the Commonwealth Bank’s latest billion-dollar result heralds more rate pain for indebted households in 2017, even if the Reserve Bank doesn’t touch the cash rate.

Australians who can afford it are saving like crazy for fear the big banks will keep hiking mortgage rates. And it seems they are right to be worried, as rising wholesale and regulatory costs tempt lenders to claw back funds from owner-occupiers.

On Wednesday, CBA posted a half-year (July-Dec) net profit after tax of $4.89 billion.

But its net interest margin (NIM) – the difference between what the bank pays for funding and what it charges on loans – fell to 2.11 per cent in the first half of the 2017 financial year, down from 2.14 per cent in the full 2016 fiscal year.

Add in the requirement from regulator APRA that banks hold more capital to protect against a crisis and there are strong signs that borrowers will soon be slugged.

Finance analyst Martin North said he expected the big lenders to continue lifting rates this year, even if the RBA cash rate stayed at a record-low 1.5 per cent.

“The real conversation here is not what the RBA does because the official cash rate has very little to do with what real mortgage holders are experiencing. We have already seen, and we will see more, out-of-cycle interest rate rises,” Mr North told The New Daily.

Much of the recent media focus has been on a crackdown by CBA and its subsidiary, BankWest, on investor lending. CBA slammed on the brakes even harder on Wednesday by lifting its interest-only home loan rate, targeted at investors, by 12 basis points to 5.68 per cent.

The average Australian may rejoice at this, as many believe investors squeeze out first home buyers.

The fear, however, is that the big banks, deterred by the regulator from writing too many investor loans and forced by competitive pressures to leave deposit rates alone, will target owner-occupiers for what Mr North called “margin repair”.

fixed variable ratesAs the chart above shows, fixed and variable rates have been pushed very low by the Reserve Bank’s heavy cuts to the official cash rate in recent years, intended to stoke the economy during the post-GFC slump.

But if readers look closely at the bottom right of the chart, they’ll see rates are trending up.

Data supplied to The New Daily by RateCity shows that while the average variable rate at the big four banks crept up by only one basis point over the last six months, the average fixed rate is now six basis points higher than in September last year.

The bigger concern for Australians is rising variable rates. About 85 per cent of current borrowers are on variable, which means any rise will hit their household budgets immediately.

owner occupier ratesIn a recent research note, JP Morgan identified rising mortgage servicing costs as the “most immediate challenge” facing Australian households.

The bank also noted that households seem to be stockpiling a “handy cash buffer” in their bank accounts “to help insulate against unexpected income and liquidity shocks”.

But Mr North noted that not all households are so well prepared.

“There are some households who are very well protected because they’ve been repaying more than they needed to on their mortgages when interest rates dropped and they’ve been saving more,” he said.

“But there are other households that are actually up to their gills in debt and have no ability to effectively make those forward bets on the market.

“And it’s not just battlers on the outskirts of cities. There are some younger, more affluent people who have bought high-rise apartments quite recently who’ve got really large mortgages and are highly leveraged and have got almost no other assets.”

household savings relative to debt

Watch the central banks

The excuse from the big lenders is that it is getting more expensive to borrow wholesale funds from overseas.

Despite what readers may have heard, the Reserve Bank’s official cash rate – the one it announces with much fanfare on the first Tuesday of every month except January – is not the only impact on the cost of lending.

This was demonstrated in a soon-to-be-published, five-year study by Australian academics Drs Simon Cottrell and Sigitas Karpavicius, a draft of which has been provided to The New Daily.

Using a sample of 1711 bond issues in five currencies by Australia’s big four banks, the academics found that the cost of wholesale funding (which contributes about 40-50 per cent of the total funding of banks) is mainly driven by international monetary policy, while the impact of the RBA’s cash rate is “insignificant”.

The US Federal Reserve is starting to lift rates, and other important central banks may soon follow, which means wholesale funding costs will continue to rise, if this study is correct.

So the big lenders have a good excuse to push up rates outside of the RBA cash rate – and households have good reason to be worried.