I was interviewed on ABC Radio this morning talking about bank exit fees. My view is that the government is moving into very dangerous waters on this issue. The whole idea of an exit fee is to discourage people from churning their mortgage. The abolition of these fees (borne by churners) will simply result in higher fees for everyone else. The surprise of the interview was when the interviwer (Joseph Thomsen) asked about building societies. I had been under the impression that building societies had all transformed into banks or been taken over by banks in the 1980s and 1990s. That was a world-wide trend after banking reforms that stopped defining institutions by function but rather as ‘deposit-taking institutions’. Yet it seems that some have survived in Australia.
In one sense those who complain about the banks and the fees they charge should promote the building society model for funding mortgages. On the other hand, however, banks are more likely to have a lower cost of capital than building societies, and moving back to a world of segmented markets where people had a savings account at the bank but had to get home loans from the building society would reverse a lot of financial deregulation for no good reason.
There was an article in The Aus today about a 24 year old bloke who is building a house in western Sydney. His mortgage eats up 85% of his income.
85%!
And he was complaining about “greedy banks”. What sort of lunatic borrows that much money – and what financial institution is crazy enough to lend that much?
boy on a bike
8 Nov 10 at 9:18 am
That is an extreme case. The other problem is that the government has been encouraging people to buy homes the last couple of years when rates have been artifically low. Now that rates are at more normal levels a lot of people – new home buyers in particular – will have some mortgage stress. My RMIT colleague Jonathan Boymal wrote on this issue last year.
Sinclair Davidson
8 Nov 10 at 9:29 am
It’s the greedy state Government that has screwed everything up with terrible public transport, development restrictions, developer fees etc driving up the cost of amenities AND available land.
A (fairly decent) $800000 house in Rouse Hill for example may cost $250k for construction costs all up.
The land is possibly $500-$600k.
The “savings” bubble that funds a lot of our superannuation is an unsustainable intergenerational redistribution.
In the late 1960s, a plain, decent 3 br L shaped bungalow in Mosman might have set you back $35k. Expensive for the time, but possibly worth over a mil now.
Population growth has not driven property prices this much. Inflation is only a partial answer. The answer lays in inelastic supply and demand being unable to adjust.
.
8 Nov 10 at 9:53 am
The banks should offer the alternative of exit fees or no exit fees. I suspect the difference would be small. I trust they are not proposing no exit fees or the equivalent for fixed rate mortgages.
rodney
8 Nov 10 at 9:55 am
Government can’t solve everything…
…says Ross Gittins.
C.L.
8 Nov 10 at 10:51 am
Gittens is an unashamed liar and holds no qualifications in economics:
“If Labor really understood and believed in market forces it would understand that banking is (necessarily) far from a free market and that the government’s extensive protection of the banks both justifies and necessitates carefully considered countervailing interventions to enhance competition and also limit the banks’ moral-hazard temptation to have Australian taxpayers indirectly underwrite their foreign adventures.”
Banking is a public good. FMD, anything of value is presently declared a public good. Political pressure means the RBA is a quasi LLR thus so it is a public good?
We’re becoming like the Athenians, addicted to the dole money that jury duty Athens used to offer.
How about having a backbone and stiffing bondholders?
Under Gitten’s bizarre logic, corporate raiders like Milken and Holmes a Court were “public goods”.
.
8 Nov 10 at 10:55 am
Strange article by Gittens. He clobbers “whingeing” punters, hails the idea that gubbermints can’t fix everything but also says that the whingers are right.
WTF?
Classic case of a lefty tortured by which hobby horse to back: the beloved ALP or bank bashing.
C.L.
8 Nov 10 at 11:01 am
Sinclair,
The name “Building Society” is simply a different classification of ADI (authorised deposit taking institution) in Australia. To use the term “bank” you need to have (IIRC) $50m in paid up capital, “building society” $10m and “credit union” or “credit society” any amount less than that. The precise ownership structure or lending strategy is irrelevant.
For all of them you need to go through an approval process that takes around 18 months to complete and then as you move between each of the classifications you need to go through another approval process before you can change your name to use one of the other ones.
In practice this favours the big banks and the big four more than any other for the usual reason that regulations favours the larger players.
APRA also likes regulating the larger more than the smaller and has actively encouraged consolidation over the last 20 years – effectively by paying more attention to the smaller guys and so imposing higher average costs on them than on the big four. When the little guys get too small, they “encourage” a larger competitor to take them over.
The WA CU and BS sectors have virtually collapsed over the last 30 years through this process. We have gone from have over 20 ADIs head-quartered here to only 3 micro ones – and those may not be long for this world.
Andrew Reynolds
8 Nov 10 at 12:50 pm
I should add that this is not an example of market failure but of the usual process of regulations restricting competition.
Andrew Reynolds
8 Nov 10 at 12:52 pm
Andrew – so what you’re saying is that Building Society is a name these days. (I thought that might be the case, but didn;t want to say so on radio).
Sinclair Davidson
8 Nov 10 at 1:32 pm
It is a name – but most of them still focus on housing lending as the name does carry some weight.
Andrew Reynolds
8 Nov 10 at 1:39 pm
Stephen Bartholomeusz agrees:
Sleetmute
8 Nov 10 at 2:01 pm
Here’s the link to the story on Mr 85%.
At just 24, Anthony Violi is already working overtime and cancelling holiday plans to cover his repayments, which eat about 85 per cent of his wage.
Rises in interest rates make him “angry” he said, and he would take advantage of a forum to tell the “greedy” banks just how “stressful” life was with a mortgage hanging over his head.
“The interest rate rises just make it even harder to live in general and this is a sacrifice I am making for the future that I hope will pay off,” he said.
Mr Violi is living with his parents while his home is being built on a new estate at Hoxton Park, 40km west of the city centre. When he moves into his new home in a month’s time, the financial impact of those repayments is going to hit even harder.
Idiot. Unfortunately, policy is made from stupid cases like this.
boy on a bike
8 Nov 10 at 2:23 pm
Poor prick lives in Hoxton Park.
He should listen to what I have say about the NSW Govt. and land prices.
.
8 Nov 10 at 3:23 pm
Can someone tell me how much of a bank’s having a lower cost of capital is due to either explicit or implicit guarantees from taxpayers?
This was the really important issue raised in Hockey’s speech a couple of weeks back.
New Gold Dream
8 Nov 10 at 4:03 pm
Very unlikely – the deposit taking institutions are all covered. The lower cost comes from size and reputation.
Sinclair Davidson
8 Nov 10 at 4:18 pm
Is it really fair to assume the government wouldn’t be much more likely to bailout one of the big four banks than it would much smaller building societies or credit unions?
New Gold Dream
8 Nov 10 at 4:47 pm
Right now they’d bail out anybody. Not that I suspect that anyone right nows needs bailing out.
Sinclair Davidson
8 Nov 10 at 4:55 pm
The government would be more likely to bail out a big bank. Why would they bail out a small organisation? There would be no political pressure to do so.
So perhaps this is factored into cost of capital for big banks.
daddy dave
8 Nov 10 at 4:58 pm
… and there is a difference in the cost of funds facing non-ADIs that is distorted due to the deposit guarantee.
New Gold Dream
8 Nov 10 at 4:58 pm
I would be very surprised if that were true – it’s an empirical question.
Sinclair Davidson
8 Nov 10 at 5:00 pm
There would be a lot of political pressure to do so. After Pyramid, I can’t see the government not bailing out any retail deposit-taking institution.
Sleetmute
8 Nov 10 at 5:13 pm
I’m not sure I believe that after the run on the money market and mortgage funds in late 2008 brought about by the deposit guarantee. The mortgage fund industry was still holding about $25bn in frozen investor funds at the beginning of this year.
New Gold Dream
8 Nov 10 at 5:13 pm
All building societies in Australia are ADIs regulated by APRA. One of the key reforms of Wallis was to transfer regulatory responsibility for state banks, building societies and credit unions to the Commonwealth. They keep their names and some of their original features but are subject to the same rules and regulations as other ADIs including banks. I bet that had building societies and credit unions remained as state regulated, there would have been a collapse of one or more causing a greater degree of panic.
Samuel J
8 Nov 10 at 6:10 pm
Samuel – That was my impression too.
Sinclair Davidson
8 Nov 10 at 6:11 pm
Still, money market and mortgage funds aren’t ADIs.
New Gold Dream
8 Nov 10 at 6:25 pm
“I’m not sure I believe that after the run on the money market and mortgage funds in late 2008 brought about by the deposit guarantee.”
Gee, was the run triggered by the deposit guarantee or the deterioriating economic situation? From memory the mortgage funds lend money to property developers and the like with a 30% LVR buffer when the loan is approved. Come the recession that buffer gets wiped out. Happened back in the early 80s and probably in the early 90s as well, but by then I’d moved from the Gold Coast and didn’t have as much knowledge about the mortgage funds.
And mortgage funds have always been a higher risk and higher return product that nobody has ever thought would have a govt guarantee. So you can use them as the basis for an argument that Joe Hockey should set interest rates.
pedro
8 Nov 10 at 6:33 pm
It was largely the deposit guarantee as far as I can recall, didn’t it trigger the run on the money market funds:
http://www.theage.com.au/business/go-to-centrelink-swans-advice-on-frozen-funds-20081023-57gk.html
Swan even told people who could no longer access their retirement savings to go and see about registering for benefits at Centrelink.
New Gold Dream
8 Nov 10 at 7:03 pm
NGD,
The question on the run was whether it was brought about by the deposit guarantee as a first order or second order effect. There is no question that the guarantee triggered a run on non-guaranteed institutions. The question is whether:
1. it came about as a result of fear that an institution was about to collapse and therefore the guarantee was needed, or
2. it came about as a result of the guarantee itself – i.e. that the rates the banks were offering with the guarantee in place we just about as good as the ones the non-guaranteed institutions were offering and that the guarantee was therefore the panicked over-reaction of a government that listened too much to the banks and copied the overseas actions.
Personally, and given the chain of vents, I would put the emphasis on 2 and that therefore, while the banks unquestionably benefited, it was from a government that panicked, rather than the funds markets themselves.
.
There would be an easy way to eliminate the implicit guarantee – just state that the government will not bail out a collapsing institution, no matter what. Done.
Andrew Reynolds
8 Nov 10 at 7:05 pm
What would happen if the government did back off? The cost of funding would go up at least 50bps, probably more with the secondary effects on earnings. This in turn would crunch earnings, because costs will be static, or force lending rates up.
And which government wants to be responsible for jacking up home loan rates?
There’s a massive implicit subsidy from taxpayers to banks and their borrowers at the moment. The taxpayers are underwriting free insurance, and banks using that to make their funding cheaper, but passing that on as loans. The net effect is to funnel money away from those with little debt and towards those with a lot of debt.
It would be both fair and amusing if the government to announce that in the event of future bailouts, the expense will be borne by people proportionately to their debts, not their income.
PSC
8 Nov 10 at 7:30 pm
Thank you Mr Reynolds, I was praying you would jump in at some point.
The IMF says “too big to fail” = 20bps lower borrowing cost.
http://www.theaustralian.com.au/business/industry-sectors/government-guarantee-is-encouraging-risk/story-e6frg96f-1225948033185
New Gold Dream
8 Nov 10 at 7:35 pm
20 bips would simply rule out uneconomic projects and end moral hazard, resulting in fewer busts.
Bank customers of Australia unite!
.
8 Nov 10 at 7:42 pm
I’ll keep saying it untill I’m blue in the face.
If a government wants to tread lightly of regulations and open the banking sector to more competition all they need to do is ask the bank raise their Tangible common equity to a higher level and then leave it alone.
JC
8 Nov 10 at 7:55 pm
[...] on from my comments on ABC Radio yesterday I received an email that contained this comment. It is really disappointing when someone such as [...]
Building Societies II at Catallaxy Files
9 Nov 10 at 8:33 am