Economics and Banking – Page 427 – Digital Finance Analytics (DFA) Blog

Lending to tighten as banks look to avoid mortgage risk

Lending to tighten as banks look to avoid mortgage risk
Specific postcodes or suburbs won’t be denied home loans, but one financial analyst believes Australia’s big banks are moving to a path of more restrictive lending.

Martin North, the principal of Digital Finance Analytics, believes major lenders will soon be introducing different lending criteria and stricter servicing requirements as they look to reduce the amount of risk they carry on their mortgage books.

“I think what we’re seeing is a general drift towards the end of the more sporty loans we were seeing, the dial has been turned up in terms of the capital requirements banks are facing and the risk dial has been turned up as APRA says these are the things we want to see happen,” North said.

“We’re not going to see ghettos were you can’t get a loan, but LVRs are going to be dialled back, it’s going to be harder to get interest only loans and there could be changes to terms and conditions so we see things such as risk premiums on loans for certain areas,” he said.

North’s comments come after Fairfax media revealed earlier this week that NAB has two groups totalling more than 80 Australian postcodes identified as either being “areas where significant deterioration in credit risk has been observed” (Group A postcodes) or “areas which are exhibiting characteristics which may indicate future deterioration in credit risk” (Group B postcodes).

There are 40 Group A postcodes, which are predominantly located in areas affected by the downturn in the resource and manufacturing industries, with 22 Western Australian and 11 Queensland postcodes in the group.

The remaining seven postcodes are found in South Australia, Northern Territory and Tasmania. The Group A postcodes are now subject to a 70% LVR.

The bank has classified 43 postcodes in Group B, with 34 of them located in Sydney, while five are found in Melbourne and suburbs in this group are now subject to an LVR of 80%.

According to North, the identified postcodes present risks due to a number of different reasons.

“The first reason is the probability of default, which is tied to economic and employment conditions, and would apply to places in Western Australia or Queensland where the mining boom has deteriorated or areas like South Australia where the manufacturing industry has been hit,” he said.

“There are also concentration risks where you have a location that has been popular and a bank has a lot of people in that area with loans and they’ll then look to throttle back on lending to there.

“The final one is overvaluation, where a bank thinks the value of properties in the area are extended and they’re concerned that in a corrective market they’ll be worth less than what the loan. These are usually areas that have seen rapid growth and an area like inner Sydney would be a good example of that.”

While banks such as NAB may be introducing measures to reduce the level of risk they take on in the future, North said the current risk position of their mortgage portfolios may not yet truly be known.

“If you look back at the loans that were written over the last 12 – 18 months when lenders were being more aggressive, then I would estimate that about 8 – 9% wouldn’t meet today’s lending criteria.

“There’s some implicit risk there and most mortgage trouble start in the first two or three years, so in the near future we’ll see whether that leads to an increase in defaults.”

ING DIRECT Increases Rates for Property Investors

ING Direct has announced they are increasing variable rates on existing investment property loans by 0.37%pa effective 5 November 2015. They had previously tightened investment loan criteria.

Existing customers who hold both owner-occupied and residential investment loans with ING Direct will not be subject to this interest rate change.

The current rates for new investment property borrowers remain unchanged. ING Direct Orange Advantage is priced at 4.84%pa (5.03%pa comparison rate) for investors.

The bank has $38 billion in mortgages on book, of which about one third are investment loans, according to recent APRA data.

Fed Still Expecting To Lift Rates

In a wide-ranging speech, at the Philip Gamble Memorial Lecture, Fed Chair Yellen discussed inflation in the US and monetary policy. The net summary is that the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.

Consistent with the inflation framework I have outlined, the medians of the projections provided by FOMC participants at our recent meeting show inflation gradually moving back to 2 percent, accompanied by a temporary decline in unemployment slightly below the median estimate of the rate expected to prevail in the longer run. These projections embody two key judgments regarding the projected relationship between real activity and interest rates. First, the real federal funds rate is currently somewhat below the level that would be consistent with real GDP expanding in line with potential, which implies that the unemployment rate is likely to continue to fall in the absence of some tightening. Second, participants implicitly expect that the various headwinds to economic growth that I mentioned earlier will continue to fade, thereby boosting the economy’s underlying strength. Combined, these two judgments imply that the real interest rate consistent with achieving and then maintaining full employment in the medium run should rise gradually over time. This expectation, coupled with inherent lags in the response of real activity and inflation to changes in monetary policy, are the key reasons that most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.

By itself, the precise timing of the first increase in our target for the federal funds rate should have only minor implications for financial conditions and the general economy. What matters for overall financial conditions is the entire trajectory of short-term interest rates that is anticipated by markets and the public. As I noted, most of my colleagues and I anticipate that economic conditions are likely to warrant raising short-term interest rates at a quite gradual pace over the next few years. It’s important to emphasize, however, that both the timing of the first rate increase and any subsequent adjustments to our federal funds rate target will depend on how developments in the economy influence the Committee’s outlook for progress toward maximum employment and 2 percent inflation.

The economic outlook, of course, is highly uncertain and it is conceivable, for example, that inflation could remain appreciably below our 2 percent target despite the apparent anchoring of inflation expectations. Here, Japan’s recent history may be instructive, survey measures of longer-term expected inflation in that country remained positive and stable even as that country experienced many years of persistent, mild deflation. The explanation for the persistent divergence between actual and expected inflation in Japan is not clear, but I believe that it illustrates a problem faced by all central banks: Economists’ understanding of the dynamics of inflation is far from perfect. Reflecting that limited understanding, the predictions of our models often err, sometimes significantly so. Accordingly, inflation may rise more slowly or rapidly than the Committee currently anticipates; should such a development occur, we would need to adjust the stance of policy in response.

Considerable uncertainties also surround the outlook for economic activity. For example, we cannot be certain about the pace at which the headwinds still restraining the domestic economy will continue to fade. Moreover, net exports have served as a significant drag on growth over the past year and recent global economic and financial developments highlight the risk that a slowdown in foreign growth might restrain U.S. economic activity somewhat further. The Committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy. That said, in response to surprises affecting the outlook for economic activity, as with those affecting inflation, the FOMC would need to adjust the stance of policy so that our actions remain consistent with inflation returning to our 2 percent objective over the medium term in the context of maximum employment.

Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.

Fixing the global financial safety net: lessons from central banking

In a speech to the David Hume Institute in Edinburgh, Minouche Shafik, Bank of England Deputy Governor for Markets and Banking, describes the global safety net for dealing with sovereign debt crises as “more of a patchwork than a safety net.” The need to fix the safety net has been brought into sharper focus by the challenges facing emerging markets: lower growth, falling commodity prices and potential spillovers from the possible exit of exceptional monetary policy in advanced economies. Drawing on lessons from central banks’ response to banks’ liquidity needs during the financial crisis, she identifies policy reforms that could reduce the systemic implications of sovereign debt crises and allow nations to cope with shocks.

“The benefits of free trade are now well established. Similarly, economic theory provides compelling arguments for the potential advantages of integrated global capital markets based on the efficient allocation of resources. But, in practice, cross-border capital flows can be fickle and flighty, with destructive effects on the real economy.” They leave nations exposed to a ‘capital stop’, in much the same way that banks can experience a run on their deposits.

Minouche concludes that the current safety net – a mix of national foreign exchange reserves, regional financing arrangements, central bank swap lines and the International Monetary Fund (IMF) – is suboptimal: fragile, fragmented, and inefficient. If we are to continue to benefit from global financial integration then we need a system that can effectively and efficiently provide liquidity insurance to fundamentally sound sovereigns in order to contain spillovers to other parts of the globe.

Drawing on the experience of central banks, she notes that more reliable provision of liquidity support has been made possible by the fact that supervision is tougher on capital and liquidity requirements, banks undergo regular stress testing, and credible resolution tools are being put in place. What would the equivalent enablers be for sovereigns? Minouche suggests:

• Better surveillance, and particularly of the vulnerabilities to sudden stops;
• Stress testing countries’ balance sheets through better debt sustainability assessments; and
• Better mechanisms for dealing with debt restructuring and reducing the risk of disorderly spillovers.

Given the “complex and messy process whereby markets and the official sector deal with sovereign debt restructurings”, how might the risk of disorderly spillovers be reduced? Three preliminary ideas are suggested:

• Using state-contingent bonds to increase risk-sharing with private sector creditors, for example GDP-linked bonds.
• Facilitating agreements on a debt restructuring in bond contracts by expanding the use of new style collective action clauses so that decisions can be taken by a majority of creditors across all bond issuances, without the need for an issuance-by-issuance vote.
• Reducing international spillovers by reviewing the preferential treatment that cross-border sovereign exposures receive in prudential regulation.

At the heart of the global safety net, Minouche suggests, needs to be a more reliably resourced IMF that has well defined arrangements for collaborating with regional financing arrangements. Unless improvements are made, it will be difficult to achieve and sustain the benefits of integrated global capital markets.

Households Still Want Property, But Its Becoming More Challenging

Contained in the latest edition of the Property Imperative, released today is an update on households and their attitude towards property. Over the next few days we will post some specific findings from the report. Today we look at aggregate demand.

To understand the current dynamics of the residential housing market we need to examine the behaviours of different household segments, because generic averaging across these diverse segments hides important differences. There are about 8.98 million households in Australia , and using analysis from the Australian Bureau of Statistics, and our own survey, we have segmented these households looking specifically at their property owning behaviour.

First we split the households into those which are property inactive, and those who are property active. Property inactive households were defined as those who currently rent, live with parents, or are homeless, with no plans to enter the market.

Property active households are those who own, or actively desire to own property, either as an owner occupier, or as an investor, and either own the property outright, have a mortgage or are actively looking. The analysis shows that about 26.1% percent of households are property inactive, which equates to about 2.35 million households. Examining past data, and applying the same analysis, we discovered that even correcting for population growth and migration, the property inactive proportion of the household population has been steadily increasing.

A similar fall in home ownership rates have been confirmed by others and it is suggested that the main reason for this trend is that house prices have simply grown faster than average incomes, thus making it harder to buy into the market.

This signals an important underlying social issue, and is not being adequately addressed. Actually, we are seeing more households becoming tenants of the growing band of property investors, whilst many younger Australians are unable to buy for themselves, or are becoming property investors first. We note that in New Zealand, the Reserve Bank is consulting on changing the capital ratios for investment loans.

However, we will focus our attention on the property active household segments. To assist in our analysis we have segmented the property active segments by motivation and type. Below we outline our segments, and how they are defined.

Want-to-Buys Household s who want to buy a property, are saving, but have not yet committed
First Timers Households who are buying, or have bought for the first time
Refinancers Households who are restructuring their finances, but not moving house
Holders Households with no plans to move or refinance
Up-Traders Households looking to buy a larger place
Down-Traders Households looking to buy a smaller place
Solo Investors Households with a single investment property
Portfolio Investors Households with a portfolio of investment property

In our survey, we also mapped these segments across owner occupied and investment property types. The chart below shows the current number of households by segment distribution, as at September 2015 .

In our surveys, we looked across a number of dimensions, within the segments. This included whether they were actively saving to buy, intending to transact, borrowing needs and house price expectations. We will outline findings from each of these.
Portfolio Investors are more likely to transact in the next 12 months (over 77%), then solo investors (43%), then down traders (47%) and refinancers (23%). First time buyers (9%) and want to buys were least likely to transact (9%). Overall demand for property is still very strong, but headwinds are slowing momentum.

That said, first time buyers are saving the hardest (72%), although want to buys (21%) and up traders (32%) are also saving.

Turning to borrowing expectations, portfolio investors are most likely to borrow more (87%), up traders (73%), first time buyers (60%) and sole investors (51%) are also in the market.

Most segments are bullish on house prices over the next 12 months, with down traders being the least excited (24%). Investors have the strongest view of potential future growth, whilst the trends across other segments suggests a weakening of expectation, at the margin.

Some segments are more likely to use a mortgage broker than others, with refinancers mostly likely to (75%), then first time buyers (55%) then investors (36%).

One of the interesting aspects of the research is how consumers select a lender. More than ever, households do initial research online, using comparison sites, or social media before making a choice, either via a broker (who are doing well just now ), or direct with lenders. However these traditional business models are now at significant risk from digital disruption. The key selection criteria is price, price and then price. Below is segmented data, showing the relative importance of price, brand, flexibility, loyalty and trust. Apart for holders, who are not in the market currently, on average 80% of purchasers will make their final decision on the price of the deal. Brand is largely irrelevant.

The average new loan has grown again, to over $428,000 for a NSW non-first time buyer, according to the ABS data to July 2015 . The growth in loan size is running more slowly than house price growth (circa 13% in NSW), but significantly above average income growth.

About 10% of loans have a fixed rate (thanks to the current low RBA cash rate and expectation of lower rates to come).

The proportion of interest only loans written continues to grow, according to APRA data. The latest data to June 2015 indicates that more than 40% of new loans are interest only.

Next time we will look in more detail at some of the segment specific data.

Nab Offers Mortgage Via Brokers Frequent Flyer Point Incentive

In a sign of the highly competitive nature of home loans, NAB has announced a major frequent flyer offer for broker-introduced clients targetting owner occupied loans. Broker customers can apply between 21 September and 31 December 2015 for 250,000 NAB Velocity Frequent Flyer Points as an alternative to a $1500 cash back offer, provide they switch their main banking to NAB.

In the latest edition of the Property Imperative, released today we highlighted the intense focus on owner occupied loans as opposed to investment loans, and the various discounts and incentives on offer. The mortgage wars just stepped up another gear!

The Federal Reserve is losing credibility by not raising rates now

From The Conversation.

So the results are in: the Federal reserve decided to keep interest rates at around zero, delaying any increase in its target for at least six more weeks.

The move did not come as a surprise to Wall Street – which was betting 3-to-1 against the hike. But that’s not because investors didn’t think the US economy was ready for a rates “liftoff.” Rather, it shows that markets did not believe the Fed has the will and power to raise rates for the first time since June 2006.

Unfortunately, they guessed right.

The economy is ready if not eager for a liftoff and a return to a normal rates environment. Investors and businesses know this. It’s time the Fed recognized this too.

Ready for liftoff

The data clearly show that the US economy hasn’t looked stronger in a very long time – a sharp improvement from earlier this year when I wrote that it wasn’t ready for an increase in interest rates.

While the labor market may not have experienced strong growth in wages yet, joblessness has plunged to 5.1%, reaching what is known as the “natural rate” of unemployment (also called “full employment”). That’s significant because achieving maximum employment is one of the Fed’s two primary mandates, and anything below the natural rate risks fueling inflation.

And inflation, its other main policy goal, is also in range of its target of 2%. Indexes of consumer prices, both including and excluding volatile energy prices, and personal spending are forecast to be right in that sweet spot of 1.5% to 2% next quarter.

Furthermore, the US economy grew a stronger-than-forecast 3.7% in the second quarter, much better than the previous three-month period and signaling the recovery is on a pretty sound footing.

The output gap – or difference between what an economy is producing and what it is capable of – remains negative at about 3%, and deflation is still a threat.

But regardless of what the Fed does now and in coming months, its target short-term rate will remain well below the long-term “normal” level of about 4% for years to come, so there is little risk a small increase will drag down growth.

Why the Fed didn’t act

According to the Federal Open Market Committee statement, the main factors that persuaded the Fed to delay liftoff are the weakening global economy, “soft” net exports and subdued inflation.

Granted, developing economies, especially China and Russia, are indeed weak as are global financial markets and that could spill over into the US. And the devaluation of the yuan in China and the recession in Canada (the US’ two largest individual trading partners) – coupled with loose monetary policy in Europe – are causing the dollar to appreciate, making US exports decline and imports rise.

It is important to understand that all of these factors except inflation are outside the Fed’s jurisdiction and its dual mandate of maintaining full employment and stable prices. If these factors matter at all to US monetary policymakers, it should only be through their effects on the US economy, in terms of inflation, labor markets and GDP.

And while an appreciating dollar and low oil prices can indeed create deflationary pressures (and reduce US GDP), the data indicate that US prices nevertheless continue to rise, if slowly.

Furthermore, a higher interest rate and stronger dollar make US assets even more attractive to global investors, thus spurring more investment, while low oil prices stimulate consumer spending. Both of these factors boost economic activity and at least partially offset any decline due to lower net exports caused by a strong dollar.

What’s at stake

What’s more important is that the impact of a small rate hike has been with us for some time. Capital is already fleeing developing economies, and the dollar has been strong for a while. Hence, the direct marginal economic effects of a 0.25 percentage point increase in the target rate on the US economy would be negligible at best.

What was really at stake was repairing the Fed’s credibility in terms of successfully shaping US monetary policy and sending a powerful signal that the US economy is in strong shape.

Hoping to avoid previous bungled attempts to adjust monetary policy in recent years that led to significant market volatility, this time the Fed spent at least half of the year updating the language in its statements and gradually preparing the world for a hike. And since it did not deliver, this tells the world that the Fed is unable or unwilling to go against market expectations.

As a result, the central bank will have to either delay the liftoff until the next meeting, slowly reshaping market expectations to be consistent with a hike at that point, or risk a financial panic if it decides on an unexpected policy shift sooner. Delaying the timing further would mean losing precious time in normalizing monetary policy, necessary so that the Fed again has the tools it needs to fight future economic downturns. There’s also the increased risk that the economy will overheat and cause inflation to spiral out of control.

There is never a perfect time to start down this path; it is always possible to find reasons to delay. But each postponement requires even stronger data to justify an eventual liftoff the next time. The problem is that with the hesitant Fed sending mixed signals to the economy, that imaginary perfect day might not ever come.

Author: Alex Nikolsko-Rzhevskyy, Associate Professor of Economics, Lehigh University

RBA Dovish In Latest Statement

The statement delivered today by the Governor, Glenn Stevens, to the House of Representatives Standing Committee on Economics in Canberra takes a dovish tone. We note especially the relatively optimistic note struck on employment.

The Australian economy continues to progress through a major adjustment, in the midst of testing international circumstances. The terms of trade have been falling for four years and have declined by a third since their peak – though that was a very, very high peak. They are now back to about the same level as in 2006 – still about 30 per cent above their 20th century average level.

Resources sector capital spending has been following the terms of trade with a lag. From an extraordinarily high peak – at about 8 per cent of GDP, nearly three times the peaks seen in most previous upswings – this investment has been falling for about two and a half years. By the time it is finished, this decline will probably total something like 5 per cent of GDP. We are probably now about halfway through the decline. It is having a predictable impact on those industries and regions that had earlier experienced the effects of the boom.

Resources sector exports have risen strongly as the greater capacity resulting from all the investment has been put to use. Australia now exports around three times the volume of iron ore that it did a decade ago, and around twice as much coal. A very large rise in exports of natural gas is in prospect over the next few years.

Outside the mining sector and parts of the economy most directly exposed to it, there are signs that conditions have been very gradually improving. Survey-based measures of business conditions have been a bit above their longer-run average levels for some time now, and the most recent readings are about where they were in 2010. A few of the non-mining sectors have shown quite marked improvements over the past twelve months.

To this we can add that the overall number of job vacancies in the economy has been increasing, even as employment opportunities in mining and some other areas diminish. The increase has not been rapid, but nonetheless the trend has clearly been upward for about two years. Since this time last year, moreover, we have seen a rise of about 200 000, or about 2 per cent, in employment. The labour force participation rate and the ratio of employment to population have both started to increase. The rate of unemployment, though variable from month to month, seems to have stopped rising, and it is at a level a bit lower than we had thought, six months ago, it might reach.

Of course, this performance is not uniform geographically or by industry. The two large south-eastern states show the largest increases in demand and employment, and dwelling prices, while conditions elsewhere are more subdued. By industry, the rise in employment has been strongest in services, especially those types of services delivered to households, though business services activities have also added to employment over the past year.

Monetary policy is seeking to support this transition, something it can do because inflation remains low. Very low interest rates, coupled with financial institutions wanting to lend, have played a part in the improvement in conditions in some sectors. Residential construction is running at very high levels, households are adding a little less of their incomes to savings and savers have been searching for higher returns. These are all indications of easy money at work. Cognisant of the risk that very low interest rates may foster a worrying debt build-up, regulatory initiatives are in place to maintain sound lending standards and capital adequacy. I hasten to add that the objective of such tools is not to control dwelling prices, but to contain leverage. The evidence is emerging that they are doing their job.

More recently, the significant decline in the exchange rate is starting to have more discernible effects on the pattern of spending and production. The decline over the past two years amounts to about 25 per cent against a rising US dollar and 18 per cent against the trade-weighted basket. We are hearing about the effects of this in our liaison and also seeing it in the data on such things as tourism flows as well as exports of business services. This is to be expected as the exchange rate adjusts to the change in the terms of trade.

Over the year to June, real GDP grew by 2 per cent. This was in line with our forecast of three months ago and at the lower end of our forecast range from a year ago. The effect of unusual weather conditions on exports meant that GDP as measured exaggerates both the strength in the March quarter and the weakness in the June quarter.

There are still some puzzles in reconciling what has happened to real GDP with what has happened to employment and indications from business surveys. Hopefully, those puzzles will be resolved over time.

Nonetheless, what is pretty clear is that the economy is growing, albeit not as fast as we would like, the adjustment to the decline in the terms of trade is well advanced, and non-mining activity is improving rather than deteriorating. If the latter trend continues, it is credible to think that we can achieve better output growth, particularly as we reach the later phases of the decline in mining investment. This is what is needed to bring down the unemployment rate.

As always, global factors will be important and the international setting continues to be a rather complex one. Since the last hearing, growth in the Chinese economy has continued to moderate. Growth in other parts of Asia was also weaker around the middle of the year. Reflecting these outcomes, forecasts for global growth over the period ahead are a little lower than they were six months ago.

That was the backdrop for a period of volatility in some financial markets. The unwinding of an equity market bubble in China appears to have served as the proximate trigger for a revision of equity valuations around the world. Risk appetite diminished somewhat and the currencies of many emerging market economies came under downward pressure.

Whether that financial volatility itself will serve further to dampen global growth prospects remains to be seen. Sometimes such events portend a wider set of economic events, but just as often, they don’t.

In the present instance, it is important to stress that long-term debt markets and core funding markets for financial institutions have not been impaired. These markets remain open and it is still the case that highly rated private borrowers and most sovereigns can borrow at remarkably low cost. Things could change, but at present we do not see anything approaching the dislocation of funding channels seen in serious crises.

To be sure, emerging market countries are under some pressure and some of them have specific problems that are being recognised by markets. At the same time, though, many emerging market countries have done quite a bit to improve their resilience over the years.

It’s also worth noting that performance in the Unites States continues to improve. Everyone knows that, eventually, this will have to be reflected in less accommodative US monetary policy. Some fretting about the first increase in US interest rates for nine years is to be expected, no matter how well telegraphed it has been. The more important factor, though, will be the pace of subsequent increases. The Federal Reserve has indicated this is expected to be very gradual, but of course that will depend on what happens with the US economy. There is a degree of irreducible uncertainty here and hence the possibility of further financial market volatility at some point. Overall though, it seems very likely that global interest rates will still be quite low for quite some time yet.

For Australia, we cannot, of course, determine our terms of trade or other forces in the global economy. We can only adjust to them. The record of adjustment in recent years is good. We negotiated the financial crisis without a major financial crisis of our own or a big downturn in economic activity. We negotiated the first two phases of the resources boom without major inflationary problems, and are part way through our adjustment to the third phase – so far without a major slump in overall economic activity. There is still a pretty good chance that we will come out of this episode fairly well, and much better than we came out of previous episodes of this type.

I now turn briefly to another area of the Bank’s responsibilities, namely the payments system. The New Payments Platform (NPP) will enable real-time, data-rich payments on a 24/7 basis for households, businesses and government agencies. The Payments System Board, having worked to facilitate the process of the private sector coming together to drive this project, supports the industry’s efforts. The Reserve Bank itself is making good progress in its own part in this project.

In the card payments area, the Bank has announced a review and we released an Issues Paper in early March. Among other things, the review contemplates the potential for changes to the regulation of card surcharges and interchange fees. It provides an opportunity to consider some of the issues raised in the Financial System Inquiry. As usual, the Bank has been consulting widely, including via a roundtable in June that included representatives from over 30 interested organisations.

The Payments System Board has asked the staff to liaise with industry participants on the possible ‘designation’ of certain card systems. A decision to designate a system is the first of a number of steps the Bank must take to exercise any of its regulatory powers in respect of a payment system, but does not commit it to a regulatory course of action. The Payments System Board will have further discussions on the case for changes to the regulatory framework at future meetings. In the event that the Board were to propose changes to the regulatory framework, the Bank would, as usual, undertake a thorough consultation process on any draft standards.

In our financial stability role, a focus has been on central counterparties, which facilitate efficient and safe clearing of some types of financial transactions. These entities are increasingly important given the way global regulatory standards have been moving. The Bank has focused on ensuring their risk management meets the highest standards and that they have the capacity to recover from financial shocks. We have also done a lot of work to ensure that our regulatory framework is appropriately recognised by regulators in other jurisdictions, which is important if we are to keep the Australian financial system connected with the global system.

ACCC not to oppose Macquarie’s bid for Esanda

The Australian Competition and Consumer Commission has announced that it will not oppose Macquarie Group Limited’s (ASX:MQG) (Macquarie) bid for the Esanda Dealer Finance business (Esanda) from the Australian and New Zealand Banking Group (ASX: ANZ). Both Macquarie and Esanda provide motor vehicle finance to motor vehicle dealerships and consumers throughout Australia.

The ACCC concluded that the possible acquisition was not likely to substantially lessen competition in the market for the supply of bailment finance and point-of-sale (POS) finance facilities to motor vehicle dealerships.

“The ACCC had some concerns that the proposed acquisition may lead to increased bailment interest rates (or lower commissions to dealers on POS finance), particularly for dealerships that do not have access to an aligned or in-house finance provider,” ACCC Chairman Rod Sims said.

“However, the ACCC concluded that on balance the combination of existing and potential competitive constraints would be sufficient to prevent a substantial lessening of competition as a result of the possible acquisition. The merged entity will face competition from Westpac/St George and manufacturer-aligned financiers as well as the possibility of new entry, and pressure from vehicle manufacturers (OEMs) to ensure that their dealers’ finance offers remain competitive with those of other dealers.”

Several vehicle manufacturers in Australia have an aligned finance arm, including Toyota Finance, Nissan Finance, BMW Finance, VW Finance and Mercedes Finance. Although aligned financiers generally only offer wholesale finance to dealerships which sell vehicles of their manufacturer, the ACCC understands that most dealerships in Australia sell multiple brands of vehicles. Accordingly the proportion of dealerships without access to an aligned financier is small. Further, one of the aligned financiers, Alphera, competes for non-BMW dealerships despite being owned by BMW.

“The ACCC also noted that if the merged entity were to increase bailment rates and/or decrease POS commissions, this would provide an incentive for other providers, including manufacturer aligned financiers such as Toyota Finance and Nissan Finance, to begin to compete for the business of unaffiliated dealerships,” Mr Sims said.

The ACCC also considered that the competitive nature of car retailing may impose a further indirect competitive constraint on Macquarie. OEMs without their own finance arms (such as GM Holden, Ford and Mazda) need to ensure that their dealers remain competitive with other OEMs’ dealers. If they perceived that increased finance costs were affecting sales of their vehicles they would have an incentive to respond. OEMs already seek to ensure competitive finance options are available to their dealers by running tenders and appointing financiers to be the ‘white label’ finance provider to their dealerships. OEMs may also be able to use these tender processes to introduce another financier into the market.

Bailment finance is acquired by dealerships to finance the vehicles held in their showrooms before they are sold to customers. Dealerships also acquire POS finance facilities to enable them to offer finance to customers purchasing vehicles, and earn commissions on the customer finance contracts they arrange.

The Fed Holds Rates

Just released by the FED, rates are on hold, because of concerns about global growth and current levels of employment and inflation. In addition they hint at lower rates for longer.

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.

The released economic data included a chart on members future expectations.Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual
participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.