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:
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.