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CBA chief Ian Narev warns against tinkering with housing policy
The Australian 12:00am March 8, 2017
Michael Roddan
Commonwealth Bank chief executive Ian Narev has warned the government not to try to make homes more affordable by “tinkering” with policies, arguing a piecemeal approach “could create short-term distortions” that “would concern us significantly”.
The warning comes as Scott Morrison prepares a package of federal budget measures to address white-hot house prices and plunging affordability.
The Treasurer on Sunday left open the possibility of capital gains tax changes as the government seeks to make it easier for Australians to buy a home.
Mr Narev, speaking yesterday at a House of Representatives committee hearing as part of a review of the major banks, said a holistic approach to housing affordability policy was needed.
“Housing affordability is an issue of great importance to our customers and our people and the whole of the country,’’ he said. “What we don’t support is individual debates about one or other of these policies in the absence of a broad view as to the different drivers of housing affordability.
“Any discussions must take into account both the supply and demand side. We worry that tinkering with one policy in the absence of thinking about the others could create short-term distortions in the housing market which would concern us significantly. “Too many of the debates have been focused on individual policies.”
Mr Narev said the bank was comfortable lending at current house price levels, but CBA shared the view that homes were “difficult to afford”.
After holding the official cash rate at a record low of 1.5 per cent yesterday, Reserve Bank governor Phillip Lowe warned that “prices are rising briskly” and that investor borrowing for housing had “picked up over recent months”.
Mr Lowe has warned high household debt and sluggish wage growth risk crushing economic growth. He recently told parliament that curbing capital gains in tandem with negative gearing reform would “reduce investor demand for a while”, which “would take some of the current heat out of the housing market”.
Last week Australian Prudential Regulation Authority chair Wayne Byres said the regulator had held “discussions” with CBA and rival lenders about the accelerating growth in investment property lending. Mr Byres said some banks were “very close” to the 10 per cent annual growth cap on lending to investors and there was “no room for complacency”.
David Murray, head of the government’s Financial System Inquiry, has told The Australian the limit is too generous.
Mr Narev yesterday admitted the CBA was getting “close” to its 10 per cent limit. The bank recently hiked rates on investor loans and its Bankwest subsidiary stopped considering negative gearing in its loan approval processes to slow growth in its loan book.
Mr Narev last month denied CBA was asked to slow investment lending and growth remained under 10 per cent. He said APRA’s data suggesting CBA was growing investor loans at an annualised pace of 10.3 per cent was incorrect due to “various technical reasons”
CBA reduces its reliance on the RBA’s emergency liquidity facility
The Australian 11:21am March 7, 2017
Stephen Bartholomeusz
During last month’s round of major bank results there was a significant development that appears to have passed unnoticed. Commonwealth Bank reduced the size of its “committed liquidity facility.”
Buried within the detail of its investor presentation was the disclosure that CBA reduced the size of its facility (CLF) by $7.5 billion on January 1. In advance of that reduction, the bank had lifted the level of high-quality liquid assets from $134bn at June 30 last year to $155bn by December 31.
The CLF has been controversial ever since it was foreshadowed in 2011 and then introduced by the Reserve Bank and the Australian Prudential Regulation Authority in 2013.
The facility is in place to provide liquidity to banks in a future crisis and was constructed in response to the global regulatory reforms that formed the response to the 2008 crisis, which require banks to hold sufficient high-quality liquidity to withstand at least 30 days of acute liquidity stress. During the GFC, of course, the major Australian banks were temporarily shut-out of global wholesale funding markets.
The problem the Australia banks faced when those new requirements were imposed was that there wasn’t a sufficient quantity of eligible high-quality securities — government and semi-government debt — that the banks could purchase.
At the time of the crisis, the gross level of Commonwealth debt outstanding was only about $136bn and in 2013, when the CLF was created, there was still only just over $250bn of Commonwealth debt at a point where APRA estimated that the potential net cash outflows in a crisis could amount to about $410bn.
Given that there weren’t sufficient high-quality liquid assets available to meet the new global requirements, the RBA established the CLF and made $275bn available.
For banks that applied for access to the facility, there was a 15 basis points a year charge. If they ever actually drew on the facility, they would pay another 25 basis points over the cash rate at that time. The banks hold portfolios of eligible securities to support their CLF exposures that they would have to lodge with the RBA if they drew on the facility.
The CLF has been controversial because it is seen as overt taxpayer support for the banks, particularly the majors, though, in fact, there are 13 authorised deposit-taking institutions that have access to the CLF.
Its critics, apart from arguing that it cements the majors’ status as “too big to fail” and therefore underwritten by the taxpayer, say that the pricing of the liquidity that would be made available in a crisis is too cheap.
There has also been an argument that, while the CLF is supposed to be designed only to provide liquidity to solvent institutions in a liquidity crisis and not to provide funding to an insolvent institution, in effect it guarantees the banks can’t become insolvent because it would ensure they could continue to meet their debts as they fell due.
In reality, given the paucity of government debt at the time, and the nature of the post-crisis global reforms, the RBA and APRA had no option but to respond to what at the time was an almost uniquely Australian challenge given Peter Costello’s legacy of no net Commonwealth debt.
CBA’s decision to start reducing the size of its facility is a sign of the changing times. The explosion in Commonwealth debt during the Rudd-Gillard-Rudd years and the inability of the Abbott or Turnbull governments to arrest the trend has resulted in gross Commonwealth debt today of about $475bn.
In 2015, the total amount of CLF that was made available was $275bn. In 2016 it was $245bn and this year it will be $223bn as the amounts of government debt available to the banks keeps ballooning towards the current debt ceiling of $500bn, which will inevitably have to be raised.
Between them, at their last balance dates, the majors had CLFs totalling more than $220bn, which, given that they pay 15 basis points just to have it in place, before the extra cost of actually using it, has made it a nice not-so-little money spinner for the RBA.
The fact that CBA is scaling back the size of its facility probably reflects both the reduced amount of CLF that is being made available as the amount of government debt on issue continues to rise and a CBA view on the cost of the facility relative to the cost of acquiring eligible assets and releasing some of the portfolio of assets that it holds under the repurchase agreement with the RBA that supports its CLF.
While the CLF has attracted criticism and while it is unusual in a global context, the RBA has historically been the “lender of last resort” to the banking system, making liquidity available to institutions experiencing stress.
What the CLF has done is to formalise that status, put a price on that prospective liquidity and create what has so far been a fee for undrawn facilities.
One could argue about the pricing and whether the 25 basis point premium over the cash rate properly reflects the value to a bank of accessing the facility in a crisis but, in the peculiar circumstances (now receding) that led to the creation of the CLF, it was a novel and necessary innovation and an improvement on the less formal backstop arrangements that previously existed.