Land of the frail and home of the brittle.

How much cheaper could mortgages be in Australia? Well consider this.

Banking at its core is a simple business. You borrow money from one person (deposits) and you lend it to another (loans). If you plan to stay in business, you lend at a price higher than that you borrow at and you make sure that the people you lend to pay you back.

Yes. It is much more complicated in the execution, but essentially the rate at which you lend = the rate at which you borrow + your operating margin.

What goes into your operating margin are things like technology costs, staff costs, rent and profit.  It also includes the costs of regulation and compliance; an ever increasing amount.

The operating margins of Australian banks are at the upper end of banks internationally for various reasons including the oligopolistic nature of the industry. But they are also on the high side because of the regulatory edifice that our governments and regulators have created. This regulatory edifice not only costs real cash money, but it also creates barriers to entry for new entrants thus further contributing to the profitability of incumbents.

The other cost of regulatory edifice is the cost to the economy from too little capital being available to business or start ups and too much for property. Banks are reluctant to take credit risk on business when easier (and regulator preferred) property deals are to be done.

As a general thing, banks don’t like for their borrowers to go broke. It is costly and unpleasant to enforce recovery of a loan. The recovery process is expensive and reputationally damaging. Hence why, banks are generally not in the business of lending to people who they don’t think can pay them back. Yes sure, circumstances change, but at the time of issuing a loan, a normal bank won’t lend to people it does not think will pay them back.

Which brings TAFKAS to the National Consumer Credit Protection Act, introduced when Labor was in power in 2009 which codifies the principle that banks should make sure that borrowers can be reasonably expected to repay their loan. You know, the stuff they should be naturally doing to stay in business.

In an ideal world, such legislation is not required, but for as long as there is an implicit government guarantee on the banks, there is some rationality for this.

But the issue is not the underlying principle but what happens when the rubber hits the road, and when ASIC gets their hands on these laws.

The recent ASIC v Westpac case was about whether a loan assessment can account for changed spending after the loan repayments start. Specifically and for example, 2 people who have jobs and regularly dine on wagyu and fine shiraz and whether they could change their consumption so that they could support a loan. Not an unreasonable proposition.

Yet ASIC does not believe that Westpac can make such an assessment. However, ASIC lost this case in the Federal Court yet had the hide to suggest:

the original judge, Justice Nye Perram, failed to understand key parts of the responsible lending laws after he described parts of ASIC’s case as being irrelevant, easily dispatched and incoherent.

Now having lost on appeal, perhaps it is ASIC that fails to understand key parts of the responsible lending laws. But that’s OK. ASIC is considering appealing to the High Court.

This case was not about whether Westpac assesses the ability of borrowers to support their loans. This case was about how Westpac assesses the ability of borrowers to support their loans.

ASIC seems to believe that it should manage the lending business of the banks by proxy. Westpac, at least with the support of the Federal Court, politely disagreed.

Now these fun and games between ASIC and the banks where ASIC is not really looking to see whether the banks are issuing inappropriate loans but rather whether the banks are being run like ASIC wants them to run is amusing to watch. But it is not free. It is expensive. Courts cost money. Lawyers cost money. Systems to even accommodate ASIC cost money.

And even if ASIC loses such cases and is required to pay the other party’s costs, it is never the case that all costs are paid.  But also because of the ASIC funding model, ASIC will recover this folly of hubris from all the banks and financial services firms is regulates.

And in the end, who pays for this?  The customers by way of higher borrowing rates and higher service costs.

So take a bow ASIC. Well done. If your executives want to determine the way banks lend, perhaps they seek jobs at the banks.

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22 Responses to Land of the frail and home of the brittle.

  1. Mak Siccar

    And in the end, who pays for this? The customers by way of higher borrowing rates and higher service costs.

    And us shareholders whose dividends are consequently reduced.

  2. I can’t believe bankers are telling high income couples to turn off Netflix or miserly millennials that having a job and a huuuge deposit but still living with Mum and Dad doesn’t cut it, they must rent for a while.

    It is just being made up as they are going along.

    Donkeys leading sheep making monkeys jump through hoops.

  3. thefrollickingmole

    Theres a flip side as well.

    American style “walk away” bankruptcies would focus the Banks minds far more on creditworthiness of their customers.
    Part of the reason for the distortion has been the ever rising property values meant even some pretty shitty credit risks could be “managed’ into housing because if they fell over the bank was covered by asset inflation anyway.

    That particular “responsible lending” helped kill my own business, in effect a person could lie on their applications then stop paying almost immediately claiming hardship.
    Then it was through the courts to try and retrieve either payment or the goods back.
    Spoiler: The courts wouldnt enforce payment on the contract.

  4. Bruce of Newcastle

    The other cost of regulatory edifice is the cost to the economy from too little capital being available to business or start ups and too much for property. Banks are reluctant to take credit risk on business when easier (and regulator preferred) property deals are to be done.

    Cart before horse.

    The regulatory edifice has just destroyed 100,000+ small businesses due to a virus that has killed 90% fewer people than cars do each year. In most cases loans those small businesses had will be repaid in cents in the dollar if at all. Why would you take the risk of lending in such a crazy business environment? The banks are just reacting to the alphabet soup quangos like ASIC who are Karening the entire economy.

  5. John Bayley

    Banking at its core is a simple business. You borrow money from one person (deposits) and you lend it to another (loans).

    You’re a bit out of date on this one.

    These days, banks just create ‘loans’ out of thin air. No deposits required.

    There used to at least be the pretence of having to keep some ‘reserves’ on hand, but you may have noticed the US Fed recently allowed commercial banks in that country to do away with those entirely. IIRC the Bank of China did almost the same some time ago.

    To ‘stimulate more lending’, you see?

    Because of course, if you’re a PhD economist, the cure for too much debt is to take on yet more debt.

    And because what does a bank need reserves for anyway, when the RBA/Fed/ECB etc will backstop them with their unlimited Ctrl+P, should anything at all go wrong?

    If they printed $4 trillion within six weeks or so, why not 40 trillion?

    After all, as the MMT gurus say, the more the government spends, the richer we all become.
    Just like it was in the USSR, apparently. They just did not have the right spreadsheets to add it all up properly, so the result was not great, but we’re much smarter these days so it’s guaranteed to work.

  6. Docket62

    American style “walk away” bankruptcies would focus the Banks minds far more on creditworthiness of their customers

    You mean non-recourse loans, and the whole reason the financial crisis occurred in the first place – because America had LVR’s of 110%. The creditworthiness of the customer was removed by the Clinton administration who instructed the two largest lenders to simply ignore this aspect and lend to literally anyone who had a pulse.

    Australia has an exceptionally well managed banking system and especially lending system – up until 2012 when the fuckwittery of the RGR era put pay to discretionary lending,asset lending and everything else except for the complete and utter bullshit that exists today.

    This legislation, added to by the moronic ineptitude of the Vacuum Cleaner (Dyson ‘I touch up my staff when I can’ Hayden) reduced the average persons borrowing ability by 70%, and virtually overnight eliminated the ability for anyone to own more than 2 investment properties unless you have no personal debt (mortgage) and at least 2 staggeringly high incomes.

    There will always be people who lie to borrow (and lend – the worst are the bank mangers not the brokers) – and businesses that fail, and jobs that are lost – but now the 99.5% must pay for the 0.5%

    Unless ASIC are taken to the cleaners (and I admire Westpac in having the balls to do so) then nothing will change AND IT MUST. We cannot have a government agency administer private lending. Otherwise the government should just buy all the banks and do it themselves – and didnt that work out well when they owned the CBA?

  7. entropy

    These people like the subsidies to make up the profits their fraudulent products cannot. If any of these renewables were any good they would be profitable without the subsidies but our journalists are too stupid to twig to it. Or am I being too generous in calling them ignorant?

    A suspicious pierson would suspect that is the political class just setting themselves up to benefit from a Euro style world where a small number of well connected families own all the apartment books and the plebs rent.

  8. Judge Dredd

    This is a minor issue. The big problem is the fact that an economy built on usury is destined to fail as the lending practices increase to a point that the compound interest outweighs growth. This is why over history debt jubilees have occurred.

    I have also recently learnt that debt is actually created by the banks, it is not lent from the money of deposits. Therefore every loan adds new money into the economy (therefore paying that back destroys that money), which ends up being a large inflationary driver. So more debt creates more problems beyond the ability to pay the loan off.

  9. tombell

    This legislation, added to by the moronic ineptitude of the Vacuum Cleaner (Dyson ‘I touch up my staff when I can’ Hayden) reduced the average persons borrowing ability by 70%, and virtually overnight eliminated the ability for anyone to own more than 2 investment properties unless you have no personal debt (mortgage) and at least 2 staggeringly high incomes.

    Kenneth Hayne was the banking Royal Commissioner.

    BTW:It’s no surprise the banks want to bail into residential mortgage lending. The capital adequacy rules almost mandate it. And just to confirm that ASIC has its finger on the economic impact pulse, the moronic Design and Distribution obligations have been put back 6 months or so. Not canned. Just deferred. A whole new industry is waiting to be spawned – and it’s gonna be big!!

  10. Natural Instinct

    I wish banking was that straightforward TAFKAS.
    You analysis is based on a cash basis (NIM and Opex) – but you forgot one of the most important pillars of banking = maturity transformation.
    … Borrow short – lend long.
    And that is where Asset and Liability Committees (ALCO) of banks come into play.
    .
    One problem lend long asset is renewable energy bird choppers. What is their NPV if government subsidies do not remain (or increase) over the asset life?
    All bank loans could be called in tomorrow if the banks thought a future governments was prepared to stop the gravy train.
    And all the industry super funds who are keen in this space would also have to take a big hit fort heir members.

  11. NoFixedAddress

    Tsk, tsk TAFKAS.

    Here you go again, banging on about ASIC (Artisans Supporting Investing Citizens) and Banking, all the time knowing that it is headed by a wonderful nomenklatura ( https://treasury.gov.au/the-department/about-treasury/our-executive ) with only our best interests in mind.

    Overseen of course by the ever watchful eyes of the fabulous Ministers https://treasury.gov.au/the-department/about-treasury/our-ministers

    https://treasury.gov.au/the-department/about-treasury/our-portfolio
    The Department of the Treasury;
    The Australian Bureau of Statistics;
    Australian Competition and Consumer Commission;
    Australian Office of Financial Management;
    Australian Prudential Regulation Authority;
    Australian Reinsurance Pool Corporation;
    Australian Securities and Investments Commission;
    The Australian Taxation Office;
    Commonwealth Grants Commission;
    Financial Adviser Standards and Ethics Authority Ltd;
    Infrastructure and Project Financing Agency;
    Inspector-General of Taxation;
    National Competition Council;
    National Housing Finance and Investment Corporation;
    Office of the Auditing and Assurance Standards Board;
    Office of the Australian Accounting Standards Board;
    Productivity Commission;
    Reserve Bank of Australia; and
    Royal Australian Mint.

    What can go wrong with that I ask you?

  12. Docket62

    Kenneth Hayne was the banking Royal Commissioner.

    I hate it when I type faster than I can think.. of course he was.

  13. have also recently learnt that debt is actually created by the banks, it is not lent from the money of deposits. Therefore every loan adds new money into the economy (therefore paying that back destroys that money), which ends up being a large inflationary driver. So more debt creates more problems beyond the ability to pay the loan off.

    It’s not a problem if the base money isn’t “printed” too fast.

    If the loans are uneconomic then they end up reducing M1 and so less can be lent.

  14. EllenG

    The question is: what credit analysis is actually occurring in banks? As far as I can tell managers of branches do nothing at all but sell debt. They gave no qualitative role. When I was in banking many years ago the credit assessment was largely local. I suspect today it’s all checklist driven. Why is this so? Because banks use securitised global markets in which Australian mortgage debt rates well and gives them cheap funds. The disconnect really happened after the 1992 crunch when mortgage originators went crazy and effectively forced banks to drop standards.
    What this has done is flood the mortgage market and squeeze small business lending.

  15. Bruce of Newcastle

    Slight correction for people who think commercial banks create money. They don’t. All their loans are from either deposits OR money market style finance, mainly from overseas sources. Which you can see any time you look at their financials.

    The RB does create money out of thin air, and they do lend it to banks who lend it to the punters. So money is being printed for that, but not by commercial lenders. Only governments are allowed access to the colour photocopier, which is understandable. Why would anyone with a monopoly let competitors do it too?

  16. @Bruce of Newcastle

    TAFKAS did say it is a lot more complicated in the detail. (Including @Natural Instinct managing the temporal arbitrage (borrow short lend long).)

    However, the others who have said banks create money are actually correct. Banks don’t need the deposits before they lend the money. They issue loans and then put a small amount of regulatory capital against the loan. It’s a leverage model. The magic of modern banking.

  17. Bruce of Newcastle

    TAFKAS – No. They have to run balance sheets like any business. So for every asset (mortgage) there’s a liability (loan from a lender or depositor).

    The banks borrow from the money markets to balance the loans they make beyond the deposits they hold from us punters. That was the problem in the GFC – the money markets, which are normally the most liquid markets on the planet, froze. Didn’t matter whether you were AAA or C- no one would lend a razoo for about two months.

    That was when Canberra stepped in and lent directly to the banks with a ticket clipping percentage. The Federal Government made quite a lot of money in doing so.

    The good thing is that since then the big 4 have pushed hard to increase the deposits proportion of their finance mix, and the punters have likewise put more money into accounts because of fear of the ASX. So deposits are now about 60-70% of the loans they’ve made (iirc). But the rest is sourced as overseas money (plus various vehicles like PERLS and shareholder equity of course).

  18. Bruce of Newcastle

    This is the problem with low interest rates. Punters refuse to accept negative interest rates for their deposits in a bank – they pull their money out as cash and stuff it under a mattress in that circumstance.

    So as interest rates fall the margin that banks can get for lending is squeezed against the floor of zero interest for deposits. Consequently monetary policy no longer works because the banks can’t lower mortgage rates because they can’t make any money from the loans.

    So all that happens is banks stop lending altogether. Which causes that ‘too little capital’ problem you mentioned.

    And that is exactly opposite of what the RB is intending by lowering interest rates…

  19. John A

    Bruce of Newcastle #3498074, posted on June 28, 2020, at 2:25 pm


    So as interest rates fall the margin that banks can get for lending is squeezed against the floor of zero interest for deposits. Consequently, monetary policy no longer works because the banks can’t lower mortgage rates because they can’t make any money from the loans.

    Umm, BofN, I am not sure of your logic here. If deposit costs are zero, then 70% of the Cost of Sales is NIL which makes for a helluva great gross profit margin (known in bank jargon as “the spread”).

    The banks no longer want to do the government’s bidding because they can’t lower their cost of funds any more, and lowering mortgage rates reduces their revenue. So it’s not as if the decision is out of their hands but there is no incentive for them to assist with government policy unless the stupid government/RBA changes the rules – again (which was what Clinton did to Freddie Mac and Ginnie May to prepare the way for the GFC).

  20. Tim Neilson

    And in the end, who pays for this? The customers by way of higher borrowing rates and higher service costs.

    And us shareholders whose dividends are consequently reduced.

    And taxpayers to the extent that ASIC doesn’t fully recoup its budget from those two.

  21. Tel

    So all that happens is banks stop lending altogether. Which causes that ‘too little capital’ problem you mentioned.

    And that is exactly opposite of what the RB is intending by lowering interest rates…

    It doesn’t take too long before the central bank gets the idea of bypassing the other banks entirely and launching the money directly into the corporate bond markets, and that’s essentially what the latest round of QE has been in the USA, with the Fed buying junk bonds.

    BTW: there is NEVER too little capital, that’s garbage. There can be capital distributed in the wrong places, but that’s highly unlikely to be fixed by additional interference.

  22. mundi

    Imagine what will happen if the population doesn’t increase anymore.

    Then the income of the person won’t really matter – property will be seen as an asset that declines in value and thus a regulator could foreseeably require the actual sale price to be below a certain value.

    They won’t step at lending standards, they will move on to regulating prices.

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