Today, John Laker, Chairman of APRA, joined Glenn Stevens in what appears to be a coordinated (and admirable) paean against excessive government-supported competition in financial services. From the SMH:
The banking regulator has cautioned that too much competition in the market could lead to increased risks for the safety of the financial system.
Australian Prudential Regulation Authority chairman John Laker told a Senate economics committee this morning that part of the subprime lending problems that emerged in the US market were due to too much competition.
Dr Laker also pointed to the Australian housing boom during 2002 and 2003 when strong competition in mortgage lending began to dilute credit standards.
“And that was a form of competition which we were uncomfortable with,” Dr Laker told the committee’s bank competition inquiry.
“We have to balance financial safety with these other considerations - but there are some competitive behaviour which trouble prudential regulators,” Dr Laker said.
This development has this blogger seeing new possibilities in the intellectual war it has previously described between Treasury/government on one hand and regulators on the other. The contest can be summarised as the RBA seeking to shift Australia from mortgage debt versus a government seeking to keep it thoroughly addicted.
If we think back to Monday last week, Peter Martin reported what had the appearance of a very solid leak summarising the forthcoming reforms:
Australia's big four banks will face government-backed competition and greater scrutiny in reforms being unveiled on Wednesday, aimed at weakening their market power.
The Treasurer’s five-point plan, which will be be presented to the federal cabinet today, is short on detail in a number of areas, proposing further consultations with banks and consumer groups to draw up measures that will work.
Mr Swan is keen to avoid a repeat of the dashed expectations that followed his 2008 bank-switching package, when a non-existent hotline and badly maintained website failed to back up the promises.
On bank-switching, the Treasurer will announce broad goals including that changing banks should be a matter of filling in just one form, and he will ask the banks and consumer organisations to refine the details.
He will mention but not endorse the idea of transferable bank account numbers as one way of achieving the goal.
The final shape of the measures will be announced in the first half of next year.
... Mr Swan’s package will give assistance to the smaller banks, building societies and credit unions, most likely by extending a government guarantee to their borrowings and also by guaranteeing their deposits even after a government guarantee on all deposits expires late next year.
The Australian Competition and Consumer Commission will be given an increased brief of overseeing banks, and ensuring fees are justified by costs.
It will also be given power to regulate ‘‘price signalling’’ by banks, constraining what they can say to shareholders, the media or other banks before rate moves.
While stopping short of regulating ATM fees as proposed by the Greens, the measures will empower the ACCC to investigate all fees and publicise its findings. Greens MP Adam Bandt said he welcomed the ‘‘indication the government is willing to take up our ideas’’, but wanted to see details.
Martin has a history of solid sources in Treasury, for instance he scooped many of the details around the Henry Review earlier this year. It is obvious too that Martin had a source for his piece, given the details and texture he provides of the forthcoming reform package. Most of the details of the "five point plan" are spot on.
There is no diffidence either in his description of a Wednesday announcement of the plan.
The difference between Martin's piece and the ultimate package was the two bank funding measures. Gone are the guarantees for wholesale funding for smaller banks and building societies and included are the covered bonds.
That leaves us two reasonable possibilities. Either Martin's source was wrong or someone ambushed the package between the Monday leak and it's planned launch on the Wednesday. The fact that the launch was delayed an extra five days is evidence for the latter.
It may have been the Cabinet.
Then again, it may have been that other group that is currently appearing in Canberra, championing limited competition for banks.
8 comments:
Or it could have been the discussion on Bubblepedia about dropping these brochures in Wayne Swan's electorate ;-)
homes4aussies.com/hpbroch.pdf
The brochure drops commenced yesterday and a total of 21,270 of them will be deposited in mailboxes in the treasurer's electorate.
The same brochures were delivered in Kevin Rudd's electorate earlier in the year.
David, would you be kind enough to explain what is a "covered bond"? , and why they were not allowed in the past?
Thanks,
Peter
A covered bond is a loan secured against a guaranteed pool of assets (mortgages).
The reason we haven't had them before is that in the event that the bank goes bust the guarantee is so strong that bond-holder has first right to sell the assets and recover his money. Including before depositors in the bank.
That has until now been illegal in Australia because we have rather sensibly protected depositors first.
I so happy that Admiral Stevens has finally come to his senses on what is required for the economy.
However I am still doubtful he will win in the end. All it will take is the introduction of covered bonds, and the game can be on again.
Peter a discussion of covered bonds and why APRA banned them is
here
Importantly
----
APRA wrote to all ADIs in January 2005 indicating its in-principle objection to covered bond structures that, in substance, subordinate the interests of depositors of ADIs to the interests of the covered bond holders. In APRA’s view, such structures are not consistent with the provisions of the Banking Act 1959 requiring that, if an ADI becomes unable to meet its obligations or suspends payment, the assets of the ADI in Australia are to be available to meet that ADI’s deposit liabilities in Australia in priority to all other liabilities of the ADI.
----
Can anyone explain what has changed that would now make APRA's view different ?
I don't think there is necessarily anything wrong with covered bonds themselves (they've existed in Europe for hundreds of years and have been pretty resilient). To protect depositors, in Europe their issuance is usually strictly capped to 4 or 5% of a bank's liabilities and the LVR of loans in the pool must be below 80%, etc.
The issue is if you can trust our regulators to be similarly strict. Probably not, in which case perhaps they are not such a good idea...
I disagree that increased competition was the cause of subprime crisis or what is happening in Australia. Any of the banks could have maintained a lower LVR and a safer balance-sheet. It is not like any of them had a gun to their head. When you have bank executives chasing bonuses, and politicians chasing votes, then you end up exactly where we are.
I would like to see the RBA having tigher controls over lending rather than just a stupid cash rate. Banks should be treated as a borrower of deposits rather than a holder of deposits and be forced to maintain an LVR set by the RBA.
Some more clarification comes from Moody's:
"The introduction of covered bonds should help major banks diversify their funding and potentially to refinance their government-guaranteed bonds, which were issued during the crisis. There appears to be some overlap in the investor base for the two instruments and the proposed cap of covered bonds at 5% of total assets should provide adequate funding capacity. The banks may also be able to borrow more cheaply selling covered bonds than senior unsecured debt.
At the same time, the low cap on covered bonds ensures that sufficient unpledged assets remain for covering the claims of unsecured creditors and depositors."
This doesn't seem to help the Banks that much, at the cost of putting another creditor ahead of depositors.
I would like to let you know what a joy it is to wake up each morning and read your delightful blog. I always feel as if you are speaking directly to me.
Post a Comment