Amidst the ongoing banking furor, one innocent little paragraph leapt out at this blogger over the weekend: "A secret briefing note obtained by The Sun-Herald confirms Treasury is working on a plan to allow customers to carry account numbers from one financial institution to another."
We already know that a key plank of Labour's new measures to increase bank competition will be mortgage portability. Although not much to go on, the above story hints that Canberra may be considering some kind of new clearing system for mortgages.
At Business Spectator recently, housing speculator Chris Joye argued for just such a system.
Joye argued for the creation of a National Electronic Credit Register (NECR) which did, among other things, allow for greater account portability:
1) A unique loan identification code (so that NECR can track the loan);
2) The loan amount;
3) The loan type (eg, 3- year fixed)
4) The interest rate;
5) The settlement/discharge date;
6) The collateral value (eg, property value);
7) The collateral address; and
8) Importantly, a nationally-defined debt serviceability standard measuring the ability of the borrower to meet the repayments on the loan (all lenders use these in one form or another, so it should be easy to define a standard metric that they have to supply, which in turn would allow us to make cross-sectional comparisons of ex ante credit quality for the first time).
He went on to argue that this would:
NECR would also revolutionise the RBA and APRA’s approach to risk-management. Allow me to illustrate a few examples. In the shadow of the GFC, regulators are understandably worried about system-wide debt levels (or ‘leverage’) and the rate of change in credit over time (ie, the process of gearing up, or, conversely, deleveraging).
These concerns are made all the more acute given the recent tapering in national house prices combined with the spectre of further rate rises. But what arguably gets regulators most energised is the so-called ‘distribution’ of these risks. That is, those borrowers sitting in the far tails of the distribution that carry the highest hazards. But disaggregating this information when banks are sending you summary statistics is an arduous task (obviously the regulators insist on some disaggregated data).
So rather than simply calculating a system-wide loan-to-value ratio (LVR) by dividing the total amount of mortgage debt (ie, circa $1 trillion) by the total amount of residential property outstanding (around $3.5 trillion), or for the pedants, the amount of property with mortgage debt held against it (about half based on the 2006 Census), the regulators would be able to measure the individual LVRs of every single loan in the country. And they would get live updates on changes in those LVRs as loans were regularly refinanced, which they are.
Since the average home loan’s life is only around 4 years (due to refinancing), it would not be long before they had individual records on all outstanding debt.
More significantly though, real-time information on the specific lending criteria employed by institutions (as proxied by, for example, LVRs and a standardised debt serviceability metric, which does not currently exist) would allow authorities to act assertively in the upswing of concurrent asset price and credit booms rather than picking up the pieces after the bubble has burst.
This argument strikes this blogger as odd. Central banks have had plenty of data in the past to identify housing and other asset bubbles, they have either chosen to ignore the signs or been ideologically blinded to them.
One example is the story of how FOMC governor Ed Gramlich lobbied Alan Greenspan to investigate mortgage fraud in the early 2000s. From The Great Crash of 2008, this blogger's co-authored book with Ross Garnaut:
According to the Wall Street Journal, even as unease about mortgage fraud grew among some Federal Reserve governors around 2000, Greenspan prevented action. This extended to proposals by Edward Gramlich, Federal Reserve governor from 1997 to 2005, to use the Reserve’s discretionary authority to crack down on predatory lending. Even in late 2004, when enthusiasm for the US housing bubble reached fever pitch, Greenspan found a favourable interpretation for events, remarking that improvements in lending practices driven by information technology have enabled lenders to reach out to households with previously unrecognized borrowing capacities.
In short, all the data in the world is useless if its interpreted though a corrupting prism.
Moreover, how exactly is the RBA going to use the blunt tool of monetary policy to dynamically manage risk in the mortgage market? It isn't.
Perhaps, if new macro-prudential tools were embraced, Joye's system could be useful, raising lending standards in a nip/tuck kind of fashion. But, in reality, this can't and won't happen. Given central banks (and other regulators) have watched bubbles build and bust for over thirty years without doing much, it is a huge stretch to think that they would ever conclude that they could dynamically manage particulars of bank portfolios better than the banks.
And in truth, why would they? Surely this represents a kind of technical moral hazard the effect of which on bankers is not difficult to imagine: I'll lend my arse off until the RBA tells me otherwise.
Another potentially destabilising feature of a central electronic clearing system is that it may make the shifting and packaging of mortgages easier, thus encouraging securitisation.
As this blogger has outlined before, Australia is yet to confront the fact that it is was securitisation that sat at the heart of the wholesale collapse of US banks, as well as the mid-tier and non banks that made up 40% of our financial services competition in mortgages.
In the US, securitisation is still being discredited by the ForeclosureGate scandal and their own version of a central electronic clearing house, the MERS, is under intense legal strain.
Do we really want to do go down this same path again?
This blog is, of course, a fan of more data for regulators, as well as greater mortgage portability to enhance competition. But continuing the practice of ad hoc innovations to the financial services regime that began with crisis measures during the GFC is eating your own tail. The overall system needs to be stabilised first.
A far better approach is to go back to first principles and ask: What kind of banking system do we want in ten years? We should be discussing such measures as dramatically increased reserving levels, breaking up too-big-to-fail banks, mitigating the wholesale funding addiction, restrictions on bank bonuses and other measures to restore a conservative banking culture, as well as how to raise new banks.