Bloody bankers. They’ve enjoyed fat profits for years and ridden roughshod over Australia’s downtrodden borrowers. They’ve forced one too many small business to the wall, ripped us off with those outrageous overdraft charges and for too long ignored pleas to scrap the ATM surcharge rort.
Now we’ve got a royal commission into the financial sector, they’re going to get their comeuppance. Right?
Well, I doubt it, especially not in the short term. That’s because the banks, despite being under the cosh on this issue for months, have managed to get on the front foot and helped to set the terms of reference for the inquiry quite narrowly.
It will look at the role of possible misconduct by banks that “falls below community standards” and will also look at whether rules protecting consumers need to be improved.
But there’s not much there to suggest that this remit will do anything to cut the bloated sector down to size, improve competition and allow consumers a choice outside the big four of the Commonwealth, Westpac, NAB and ANZ.
Instead, efforts to impose stricter standards on lending practices is likely to mean that the cost of borrowing goes up.
The last decade has seen Australians gorge on a steady flow of cheap mortgage credit provided by the banks. Their super-charged profits – the Commonwealth alone made $10bn last year – are not the result of some particular Australian genius but rather a colossal borrowing binge that has seen house prices skyrocket and household debt rise to one of the highest levels in the world.
If the rules are to be changed and the banks are forced to write fewer mortgages, they’re going to charge more for them in order to maintain their margins. There will be pushback if they try but the reality is they’ve already started to make it harder and more expensive to borrow, especially for investors, in the wake of a regulatory crackdown in the past couple of years.
At the same time, the cost of borrowing on international wholesale markets is going up thanks to the rise in US interest rates. Australian banks will no longer be able to import capital so cheaply, adding another upward pressure on mortgages.
In forcing the government to set up the commission, MPs have been responding to their under-pressure constituents who want to see the banks given a bit of a kicking. That’s totally understandable. It’s also telling that a lot of the clamour has come from Nationals whose rural electorates are a long way from the seemingly eternal feelgood factor of the rising city property prices.
But higher borrowing costs would be a cruel outcome for those voters and a long way from the kind of populist victory some might imagine today. Sunlight is the best disinfectant, true – but it could also be very expensive.
The markets certainly don’t think this commission is devastatingly bad news for the banks. If it was you’d expect their share price to be pummelled. The Commonwealth dropped down 2% on Thursday, a considerable fall, but NAB shares went up 1% and overall the sector was down 0.8%. Not a bad outcome if you’re sitting in the boardrooms of the banks. Far from being the beginning of the end for the big four’s stranglehold on the economy, it looks like business as usual.
However, there is a chance that the inquiry could pan out in a different way.
One aspect of the recent regulatory crackdown on the banks concerns so-called “liar loans”, where people have borrowed sums that they cannot possibly hope to pay back. This kind of cultural issue is the very thing the inquiry is pledged to examine but it could root out something much more serious than just a few shoddy loans.
According to research by Digital Finance Analytics, almost one million households are suffering mortgage stress – ie their income doesn’t leave them enough money to live on after they’ve made their repayments. That’s quite a lot of people at a time when interest rates are at an all-time low and should flash a red alert about lending practices, especially because wages are going backwards.
There is already a lot of evidence that dubious lending practices are widespread in the banking industry and have fed the “liar loans” culture. NAB recently sacked 20 staff for writing suspect loans. That might be prudent intervention by management, or those 20 staff might represent the tip of an iceberg hiding a whole range of abuses and bad practices. A survey by UBS this year found that a third of all loans – $500bn worth – might be based on incorrect information.
If the inquiry exposes something on that sort of scale, it could be a serious problem for the banks. Besides undermining investor confidence, it would, combined with higher interest rates, raise questions about whether hundreds of millions of dollars of debt could ever be repaid. That in turn would cause an earthquake in the already shaky property market, and at that point all bets are off not just for the banks but for Australia Pty Ltd.
