Josh Frydenberg’s first test as Treasurer has been laid out before him and it involves him regulating the regulator called the Australian Prudential Regulatory Authority or APRA, as it’s commonly called. Generally, I like to be respectful of bodies such as APRA, the Reserve Bank and Treasury because they’re usually stacked with smart people who have the country’s best interests at heart.
However, they sometimes allow their single focus job to get in the way of the big picture. And that’s where an outstanding Treasurer has to step up to the plate and stick his or her neck out and be counted.
Paul Keating did it. So did Peter Costello. They weren’t always right but their overall scores for competence point to them not being general nincompoops. I won’t evaluate others because I don’t want to insult some Aussies who did their best but their best just wasn’t up to the mark for someone given the gift of being called Australia’s Treasurer.
Be clear on this: I’m an APRA fan. But it doesn’t stop me from sometimes questioning whether they’d should rethink some of their decisions.
APRA saved Australia from a possible recession during the GFC by ensuring our big four banks’ balance sheets and investing processes left them in the top 10 banks in the world by 2009! Strong banks and a Government that had been running big budget surpluses than KO’d a lot of debt left Australia prepared to cop the GFC and dodge a recession.
We were helped by Treasury Secretary, Ken Henry’s advice to Treasurer Wayne Swan to throw money at the economy as well but the real solidity to our financial foundations laid with our banks and APRA’s role in keeping them safe compared to most banks in the world.
But that was then. This is now. And given APRA’s behaviour this week bouncing Westpac, it might be time for Josh to ask the question: Is APRA going too far and could it jeopardise economic growth, job creation and force the Reserve Bank to cut the cash rate down to 0.5%, as Macquarie’s economist Justin Fabo predicted?
Just because APRA got it right big time before the GFC doesn’t mean it’s faultless. Let’s face it, the current economic slowdown in Australia has been created by Donald Trump’s trade war and its impact on global as well as Chinese economic growth. On top of that, the Royal Commission fallout has taken away the confidence of the banks and they’re playing the responsible lender too well, such that the CEO of Mortgage Choice, Susan Mitchell, says one in five borrowers who used to get loans are now missing out!
This is an economic problem and looks like the RC has effectively opened up a bank problem ‘nut’ with a sledgehammer! This followed APRA’s decision to tell banks to play very hardball with property investors and Chinese borrowers, who were loving buying properties in Australia a few years back.
This combined crushing of potential buyers explains why the house price boom has turned into home sellers’ gloom, as prices have tumbled in Sydney and Melbourne in particular.
Against this we recently learnt that APRA was taking a softer view on what banks had to do to assess a borrower’s right to a loan. This belief became real when Westpac took the bold step on Wednesday to make it easier for lenders to get money from a bank.
On Thursday, the AFR revealed that “Westpac has unleashed a fresh wave of property lending by relaxing serviceability conditions on low risk home loans, immediately increasing the borrowing capacity of aspiring home owners by as much as 8 per cent.”
The serviceability floor, which is the minimum interest rate a borrower must be able to pay, has been reduced to 6.5% from 7.25%, so I concluded that the change will spread from bank to bank and borrowing should pick up.
However, by Friday, we learnt APRA had bounced Westpac and this easier access to bigger loans for, wait for it, “low risk borrowers”, was to be reversed!
Effectively, APRA has demonstrated that it doesn’t trust the big four banks in making loans and assessing customers, so it wants to persist with stopping good borrowers to get money.
I don’t want bad credit risks getting loans but I also don’t want good credit risks missing out. While on that subject, someone needs to do something about the discrimination that currently exists against older borrowers getting loans.
I know of retirees who have lots of cash with big income, including huge franking credits, who can’t get a loan because they don’t have a job!
It means someone could be living on $200,000 a year as a retiree but can’t get a $300,000 loan because they’re not getting a wage! That sounds like discrimination with a capital D.
Right now, a borrower could be borrowing at 3.5% but a bank is forced to see if this borrower would be able to service the loan if the interest rate went to 7.25%! This is overkill. It’s impinging on our economic growth, our job creation, house prices, consumer and business confidence and, ultimately, the investment that will ensure we all keep our jobs and our businesses remain out of bankruptcy!
This is why it’s Josh Frydenberg’s job to make APRA ease up to a degree. He needs to take the sledgehammer off the regulator, while warning the banks that dumb lending will be met with penalties.
Leadership takes guts. As the old saying goes: “no guts, no glory.”