We’ll all pay later for Australian Major Bank probe

The Australian 12:00am March 1, 2019

Maurice Newman

Not all bankers are psychopaths. Not all of them are Machiavellian narcissists who lack conscience and empathy.

Yet if you had read the papers or tuned into the nightly news as they reported on the banking royal commission, you could be forgiven for thinking they are.

Because of their position of trust and the perceived knowledge asymmetry in retail markets, bankers are held to a high standard of behaviour, as they should be. The commission noted this by publicly identifying numerous examples of misconduct. Most of these had already been uncovered and were being addressed by the Australian Prudential Regulation Authority.

It may be hard to imagine today, but in the years ahead, when the political atmosphere is less charged, analysts may well observe that Kenneth Hayne’s royal commission was ill-conceived and ill-timed. The collateral damage these hearings and their recommendations will inflict on banking and the economy should not be ­underestimated.

This is not to criticise Hayne or his findings but find fault with a political system that fails to fully comprehend the issues and the downsides of miscalculation. It is a commentary on a political class that in its lust for votes fails to properly consider the impact of destructive daily theatre on the human psyche in overheated markets.

It is not as though the government was unaware of the warnings from the Reserve Bank of Australia and APRA of a “build-up of risks associated with the housing market”. Or that it was uninformed of the constructive work being done by APRA behind closed doors to change bank culture and practices. With balance sheets overwhelmingly dominated by mortgage finance, the banks and the authorities knew the systemic risk. It’s why, away from the glare of publicity, banks willingly collaborated.

The political class should have foreseen that faced with daily public beatings, bankers would take cover. Their default position would be risk aversion and the tightening of credit.

But for a media baying for blood and for those who revel in government interference, the appeal of putting bankers in the dock proved irresistible.

Of course, for politicians there was no self-examination of the distortions their support of the banking cartel created. No culpability for the predictable effects of limited competition and excess liquidity. And no recognition of how these factors, combined with high immigration and foreign investment, created a bubble in the market for dwellings.

Yet there can be little doubt this mix gave rise to a tyranny of success, which human frailty exploited. In turn, boards were blind to a culture that rewarded lazy and unacceptable management practices.

This doesn’t condone the conduct but it explains how unacceptable practices can thrive in such a promiscuous, protected, environment.

But the royal commission is not the end of it. Now, equally battered regulators are out to make amends. Criminal and civil prosecutions will follow, and fear will permeate boardrooms.

The response will be more risk aversion and the further tightening of borrowing standards.

Lending laws which switch accountability from the borrower to the lender will make it harder for homebuyers to get access to funds through traditional lenders. In such a risk-averse environment, flexibility and innovation will be stifled, putting traditional lenders at risk of digital disruption and borrowers paying more.

At a time when our high debt-to-income, price-to-income and price-to-rent ratios point to a bubble, the commission has largely contributed to an avoidable credit squeeze.

The impact on house prices has been immediate, leaving the RBA well behind the curve with its monetary policy.

Fortunately, APRA was quicker to read the tea leaves. With house prices falling rapidly, it removed its 21-month-old policy to cap risky, interest-only loans at 30 per cent, claiming it had achieved its purpose.

In the meantime, the wealth effect, where people feel poorer as the value of their property declines, is being reflected in retail sales which, in December, fell by 0.4 per cent month-over-month.

Households have received little increase in real wages in recent times and are now being squeezed by higher electricity prices and a hike in food prices, thanks to droughts and floods. Wage earners are a hostage to unemployment and further falls in dwelling values. Banks face huge losses.

CoreLogic data for January shows Sydney and Melbourne house prices were 12.3 per cent and 8.7 per cent down from their respective peaks in July and ­November 2017. Melbourne fell at “the fastest rate ever seen”.

Where will it end?

According to The Economist, Sydney house prices are “50 per cent overvalued”. However, most forecasters predict declines of between 25 to 30 per cent, peak to trough. LF Economics mounts a compelling case for prices to drop more than 40 per cent. Exacerbating the slide is a significant fall-off in Chinese buyers. Housing supply and demand is the closest it has been in 15 years.

Labor’s latest election manifesto will only add impetus to what is now a bear market. First, its pledge to have a $640 million bank-financed “victims of misconduct” fund will simply create a demand for ­alleged victims and make borrowing more difficult.

Second, its negative gearing and punitive capital gains tax proposals will curb investment in rental properties. Already, amid fear of these measures, investor loans have declined to 2011 levels.

For traditional banks, the legacy is additional costs and legal ambiguity. And for borrowers, loans just got more expensive and less effectively regulated as shadow banks fill the void.