Economics and Banking – Page 431 – Digital Finance Analytics (DFA) Blog

Investment Lending Highest Ever At 52.8%

The latest housing finance data from the ABS to June 2015 shows continued growth, especially in refinancing and investment lending. Excluding refinance, 52.8% of all loans written in the month were for investment purposes – another record. No sign of any impact of tighter regulation showing yet. Total lending in the month (trend) was $32.2 billion (up 0.16% from last month), of which owner occupied loans were $12.2 billion (down 0.18%), refinance $6.1 billion (up 0.21%) and investment lending $13.7 billion (up 0.75%). The ABS rolls in refinance into the owner occupied numbers, which overall went up 0.1%.

Within owner occupied loans, the trend changes clearly show that the purchase of new dwellings continues to grow the strongest, Refinancing was up as a percentage of all lending to 33.2%. Another record.

The rate of change of owner occupied refinancing is slowing, along with construction lending and purchased of established dwellings.

The number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 15.9% in June 2015 from 15.6% in May 2015. First time buyers were active, with the original number of first time owner occupied borrowers up 6.8%, to 8,737. In addition, we overlay the DFA household survey data of investor first time buyers, which rose by 3.5% in the month to 4,453. Whilst the bulk were in Sydney we are continue to see a rise in investors in other states. As a result the total number of first time buyer transactions was 13,191, up 5.65%.

Lie-bore: powerful bank regulators running out of excuses

From The Conversation.

The 14-year sentence handed to Tom Hayes, the Yen trader at the centre of the Libor-fixing scandal in the UK, is the longest sentence yet in a scandal that has cost his former employer UBS, and others, US$17 billion in fines.

Apart from his obvious guilt, Hayes went out of his way to antagonise the Court, and the Judge.

Hayes, described as the “Machiavelli of Libor”, will not be the last to suffer the consequences of this fraud. Unfortunately, however, it appears bank executives will not be among those punished. And this is curious. UBS either knew, turned a blind eye, or had such weak internal controls that Hayes was able to perpetrate this fraud for three some years.

UBS was no doubt motivated, in part, by the US$260 million Hayes made for it. All the while he was being courted by the usual suspects: Lehman Brothers and Goldman Sachs.

He then fell out with UBS, over pay, and joined Citibank. Within a year Citibank had discovered his fraud. What at UBS we were led to believe remained undiscovered for in excess of three years, Citi sacked him for.

Along with Libor fixing went the obligatory “Bollinger by the case” lifestyle, amply supported by a perverse incentive structure. Hayes claimed in testimony that his managers were well aware of what he was doing. Indeed one trader remarked “mom Teresa would have rigged Libor had she been trading it!”.

Tactically, Hayes was no genius. He gave 80 hours of sworn testimony to the Serious Fraud Office (SFO) as part of a plea deal. He then decided to renege on that deal, and plead not guilty. But he failed to make the admissibility of the testimony contingent upon the plea deal. So he was left pleading not guilty, facing 80 hours of his own testimony.

ASIC’s role

In Australia the Australian Securities and Investments Commission (ASIC) is investigating rigging of the bank bill swap rate, as well as misconduct in the forex rate. True to form, ASIC is again taking a “light-touch” approach, appealing to bankers’ better nature, despite the gathering storm in the community and the rage sweeping the Senate select committee.

ASIC obviously cannot read the writing on the wall, or seems unable to understand its remit: to enforce the law, with prosecutions if necessary, not gentle cajoling. The result is systemic fraud taking root within the financial system. Individual investors lose. As does every trader and banker who is honest and doing the right thing.

ASIC Chairman Greg Medcraft has expressed his frustration that banks are adopting an overly legalistic approach. But he neglects to mention the very substantial power that ASIC possesses. This includes the power to search, to seize, to eavesdrop, to enter, to inspect, to compel disclosure. Nor does he mention that ASIC has substantial resources, and could quite easily target one bank, or one trader, to make the point that rigging interest rates will not go unpunished.

This comes on top of a litany of failures from ASIC to enforce the law: the financial advice scandals at CBA, NAB and Macquarie, front-running and insider trading at IOOF, and now interest rates. As my colleague Pat McConnell wrote recently in The Conversation, most of the compliance being compelled in the financial industry is not thanks to ASIC, but the result of investigative journalism from “one-woman regulator” Adele Ferguson.

Josh Frydenberg, assistant Treasurer, has announced a review of ASIC. But the review will not accept submissions, so is hardly consultative.

Having worked for ASIC’s sister organisation and bank regulator APRA, I can attest to cultural impediments within government that do not take kindly to criticism, and are deeply resistant to anything that challenges the prevailing orthodoxy. Disappointingly, these were exactly some of the criticisms levelled against APRA after the collapse of HIH. On that occasion the Royal Commission called for changes to APRA that would reform the culture of the bank regulator. For a time APRA seemed genuinely engaged in this project. But it has long since fallen back into old habits: civil service mandarins more concerned with building personal empires than building resilience in the financial system.

It’s time for the creation of a Financial Regulator Assessment Board, in line with a recommendation (27) from the Financial System Inquiry. Nothing short of an ongoing, independent review of the corporate cop will stop Australia’s slide into systemic corruption. A board, comprised of wise women and men, not connected to government (Treasury, the RBA, APRA or ASIC), and who have no skin in the game, are more likely to provide the kind of over the horizon views of financial system challenges, than are hand-picked bureaucrats, picked by the assistant Treasurer.

Some might view the establishment of such a board as duplication. Which in some ways is exactly what it is.

But in aircraft engineering duplication is called “double-redundancy”. In other words, when one system fails, a second, back-up system picks up where the first, failed system left off. This is exactly what a Financial Regulator Assessment Board could do for the financial system.

Must we wait for a financial crisis before this idea is implemented?

Author: Andrew Schmulow, Senior Research Associate, Melbourne Law School. Visiting Researcher, Oliver Schreiner School of Law, University of the Witwatersrand, Johannesburg. at University of Melbourne

APRA’s Opening Statement to Inquiry on Home Ownership

Wayne Byres opening remarks to the House of Representatives Standing Committee on Economics Inquiry into Home Ownership. He suggests that investment loan growth rates are likely to remain above 10% for some time yet.

Our submission to the Inquiry noted the steps APRA has been taking to reinforce sound lending standards in the housing sector. As we have noted, these efforts are not targeted at promoting home ownership or housing affordability. Rather, our goal has been to preserve the financial strength of the banking sector, by ensuring authorised deposit-taking institutions (ADIs) are well capitalised and lending on a sound basis, and borrowers are well placed to continue to meet their commitments regardless of changes in the economic environment in future.

It is important to note that APRA’s concerns are not driven solely by housing price growth in the major markets of Sydney and Melbourne. Our objective has been to ensure that in the broader environment of high house prices, high household debt, historically low interest rates and subdued income growth – along with strong competitive pressures within the financial system – sound lending standards are maintained across the board. Thus far, we have not imposed formal regulatory requirements in relation to lending practices: put simply, we have requested banks to take a prudent view of borrower income, ensure they are not underestimating a borrower’s living expenses, and allow for the fact that interest rates will not always be as low as they are today. None of this should be seen as anything other than common sense. Our greater scrutiny has, however, prompted some changes to market practice as more aggressive lending has moderated.

When it comes to the growth of investor lending, we have flagged a benchmark of 10 per cent; above that, ADIs may need additional capital. Actual growth remains marginally above this level, and may well be so for the next few months, but we have seen clear moderation in the previous strong upward trajectory, and the large lenders have all indicated their intention to move within this benchmark. This has generated a range of responses over the past month or so, including, most recently, differential pricing for owner-occupiers and investors.

We’re happy to answer further questions on the impact of our initiatives this morning. In addition, since we made our submission we have also announced another measure that is expected to impact on housing lending dynamics. That is, on 20 July we announced an increase in risk weights for housing loans for those banks that use their own internal models to determine their capital requirements (the major banks and Macquarie Bank). This decision was taken in response to a number of factors:

competition issues highlighted by the FSI;

the direction of international work being undertaken by the Basel Committee on Banking Supervision to improve the reliability and comparability of risk models; and

the desire to strengthen the resilience of ADIs using internal models and, through that, the broader financial system.

In very rough terms, the higher risk weights will require each affected bank to fund each $100 of housing loans with, on average, about $1 extra in shareholders’ funds (and hence $1 less in depositors’ funds or other debt). Given implementation is still 11 months away, it is too early to assess the impact of this change on the housing loan market. However, all other things being equal, the change will reduce the return on equity from housing lending for the affected banks. The extent to which those banks are capable of repricing their business in response will provide an interesting insight into the extent to which the largest banks are subject to competitive pressure from the range of other housing lenders present in the market.

Turnbull’s plan to speed up the delivery of Australia’s broadband network

From The Conversation.

The number of people involved in Australia’s national broadband network (nbn) is set to double to about 9,000 after Communications Minister Malcolm Turnbull this week announced plans to recruit and train an extra 4,500 workers.

This will make it even faster to roll out the rest of the national broadband network, and no doubt symbolises the Coalition’s leaner, quicker-to-roll-out version of the original NBN – re-branded earlier this year as a lower-case nbn for a reported A$700,000.

But why the rush?

Let’s have a look at what has been achieved in the past six years.

In the beginning…

The Howard Government struggled with all things internet. Australia had “fraudband” because it was too expensive and slow.

Then Opposition leader, Kevin Rudd, said a national broadband network was “nation-building for the 21st century”. And after Labor’s election, NBN Co was born on April 9, 2009.

However, the NBN took a back seat due to Labor’s leadership turmoil. Except when the Coalition poked fun at the NBN for taking too long. NBN Co blamed its partners and then its boss quit.

Things were going downhill.

From NBN to nbn

The Coalition’s cost-benefit analysis, released almost a year ago, found Labor’s NBN was extravagant. NBN was stripped back by changing Labor’s fibre-to-the-home model to a multi-technology mix (MTM) model. Slower speeds but rolled out faster – that was the plan.

Now Turnbull is having a bob each way with the broadband network. Finish the bits already started with fibre, then finish the bits that haven’t been started yet using multiple and ultimately cheaper technologies. Makes sense.

Although he would probably prefer to let the market sort it all out. If people want broadband, then somebody will sell it to them. Except maybe in the bush. Then the government should help make it work. Kevin07 thought government could do it all better – that’s why he set up NBN.

So Turnbull had little choice but to continue with the contracts set up by Labor. That’s the trouble with building things: it’s expensive to change your mind once the building starts.

It’s also hard to tear up contracts once they’ve started. Do this too many times and big business might stop building things for you. And when you are a politician, this makes you look bad.

The whole point of NBN was to fix the “fraudband”. Now we have nbn with a MTM. Occasionally the Coalition still struggles with internet things, but not Turnbull. He wants to ensure Australia gets the nbn sooner rather than later.

How are we travelling?

Well, it depends. The whole point of spending billions of dollars on NBN (nbn) was to give Australians better access to faster broadband. Since last election, NBN was available to 1 in 50 households. Now nbn is available to 1 in 10. Things are looking up.

But how do we stack up against other countries?

I usually compare Australia with Canada, but it can be helpful to compare Australia with other countries in the OECD too. This is how Australia fared before Kevin07:

Broadband Subscribers per 100 People, June 2007. OECD Broadband Growth and Policies in OECD Countries 2008

Then, just before NBN Co was born, Australians appear to have stopped subscribing while they waited patiently for better broadband. Compared with other OECD member countries, this meant that Australian broadband was worse than before the 2007 election:

Broadband Subscribers per 100 People, December 2008. OECD Broadband Portal (Accessed 29 July 2012)

The trouble is, after six years of NBN (nbn), things are still heading south:

OECD Fixed broadband subscriptions per 100 inhabitants, by technology, December 2014 OECD Broadband Portal (Accessed 3 August 2015)

Now let’s look at broadband speeds. To make it easier to read the graph, I have chosen to compare Australia with New Zealand, Canada, the United Kingdom, the United States and Greece. I chose the last one because Greece is having problems at the moment and it might help put things in perspective.

The graph below shows the fraction of subscribers with connection speeds of greater than 15mbps. Remember, NBN was meant to provide up to 100mbps and nbn at least 25mbps:

Akamai State of the Internet Report: Speeds greater than 15mbps. Akamai State of the Internet Connectivity Visualizations

What does it all mean? I’ve argued for many years that government control of the market stifles industry. That’s not to say that smarter ways of privatising Telstra or deploying NBN couldn’t have made a difference. We can hypothesise until the cows come home.

But one of the richest OECD countries – Australia – has broadband speeds closer to one of the poorest – Greece.

Has it been worth it?

Streaming services such as Netflix should boost fixed-line broadband demand. This might prove to be a self-fulfilling prophecy for the Coalition.

But when the next new technology comes along, government shouldn’t try to second-guess the market. Indeed, where government wasn’t meddling, the market has worked. Australia is a world leader in mobile broadband, for example:

OECD Mobile broadband subscriptions per 100 inhabitants, by technology, December 2014 OECD Broadband Portal (Accessed 3 August 2015)

It’s getting harder to see the public value in nbn. But it’s too late to stop it now. Better to double the workforce and finish it quickly and quietly. That seems to be Turnbull’s way out of this mess.

Author: Michael de Percy, Senior Lecturer in Political Science at University of Canberra

Westpac To Stop Facilities For Payday Lenders

Westpac has today written to some of its Payday customers and have informed them that the bank has taken the decision to cease to provide banking and financial products and services to its customers who provide Short Term Credit Contracts (STCCs) or Small Amount Credit Contracts (SACCs) under section 5(1) of the National Consumer Credit Protection Act 2009 (cth).

According to a release from Cash Converters, the Company currently has a securitisation facility with Westpac drawn to $59m which is contracted to March 2016 with an approximate six month run-off period. Westpac also provides transactional banking services to the Company and have agreed to provide these services until the expiry date of the securitisation facility.

In a parallel announcement, Money3 Corporation Limited (‘Money3’) also received notice from Westpac of their intent to cease their banking relationship. The Westpac securitisation facility accessed by Money3 to fund the automotive business is currently drawn to approximately $10 million and Money3 says it has the capacity to repay the facility from existing cash flows. The existing facility has a 12 month run off period after December 2015. In addition to the $10million Westpac facility Money3 has in place a $30 million corporate bond facility that is unaffected by Westpac’s decision.

Westpac was the only major lender providing funding to the Payday sector and had been criticised for this by a number of stakeholders.

Mortgage Rate Changes Have Little To Do With APRA

In the latest DFA video blog we discuss the recent mortgage rate changes. The regional banks, who will not be impacted by changes to capital weightings, and are not over the investment loan 10% speed limit, lifted their investment loan rates, following the majors. Across the industry, new and refinanced owner occupied loans are now potentially cheaper.

We argue that whilst the banks have used the APRA speed limits and the proposed capital weighting changes (which do not come in until next year) as the excuse, the changes have more to do with competitive dynamics and pre-positioning for driving owner occupied lending hard. In addition, APRA has no interest in building competition in banking, its all about financial stability. We conclude their interventions have provided a convenient platform for the banks, en masse, to increase margins at the expense of investment borrowers. It also demonstrates the pricing power of the majors.

Refinancing Will Be The Next Big Thing

As the banks dial back investor lending to meet the speed limit set by APRA, owner occupied loans are becoming the focus. Within that, we are already seeing very attractive refinance deals – including low rates and cash backs. One lender has announced a 4.19% home loan variable rate for owner occupiers, with an LVR 80-85% LMI refund offer for new owner occupier home loans and $2000 cashback for owner occupiers purchasing or refinancing their own home.

We think refinancing, will become the centre of attention, so the latest findings from our household surveys include detailed analysis of the dynamics of refinancing households. There are around 535,000 owner occupied households in our refinance segment, plus 134,000 who are investors, and 3,300 who have property in a SMSF account. This is a significant number. The latest monthly transaction data from the ABS shows a lift in refinancing, and we think this will continue as investment lending tightens.

Trend-Lending-Flows-May-2015

First we look at underlying drivers. The most significant reason to consider a refinance is to reduce monthly repayments with 40% of households considering refinance looking for lower rates. The recent rate reductions for such deals will help stoke the market. We also see a rise in those looking to refinance to facilitate withdrawing capital thanks to recent house price gains. The capital is being used for a range of activities, including paying off credit card debt, paying for renovations, a holiday, or a wedding. For many, this makes economic sense, as interest rates on a mortgage are lower than short-term finance. However, it lifts the LVR and raises household debt, not necessarily without risk. Some will fix a rate, but more are thinking rates may go lower yet, so are preferring to go for a variable rate. Not a bad call in the current conditions.

Looking at the refinance drives across the loan value, we see that those with the largest loans are most likely to release capital, and those with loans between $250-500k most likely to seek to reduce monthly payments, and also will reset a fixed term loan.

Larger loans are more likely to be refinanced to interest only, whereas smaller loans are more likely to be principal and interest refinancing,

Finally, those seeking to refinance are most likely of any segment to use a broker in the transaction. So brokers need to be honing their refinancing discussion (having spend the last few months focussing on the investment sector).

RBA Cash Rate Unchanged

At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.

The global economy is expanding at a moderate pace, but some key commodity prices are much lower than a year ago. Much of this trend appears to reflect increased supply, including from Australia. Australia’s terms of trade are falling nonetheless.

The Federal Reserve is expected to start increasing its policy rate later this year, but some other major central banks are continuing to ease policy. Hence, global financial conditions remain very accommodative. Despite fluctuations in markets associated with the respective developments in China and Greece, long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low.

In Australia, the available information suggests that the economy has continued to grow. While the rate of growth has been somewhat below longer-term averages, it has been associated with somewhat stronger growth of employment and a steady rate of unemployment over the past year. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet. Recent information confirms that domestic inflationary pressures have been contained. That should remain the case for some time, given the very slow growth in labour costs. Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with growth in lending to the housing market broadly steady over recent months. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have been supported by lower long-term interest rates. The Australian dollar is adjusting to the significant declines in key commodity prices.

The Board today judged that leaving the cash rate unchanged was appropriate at this meeting. Further information on economic and financial conditions to be received over the period ahead will inform the Board’s ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.

Suncorp and Bank of Queensland Join The Rate Rise Dance

More banks join the investment loans rate hike.

Suncorp increased its interest rates by up to 0.27% p.a. for standard variable and access equity (to 5.81% p.a.) and back to basics rates (to 5.23% p.a.) for new and existing investor loans, effective 31 August.

Bank of Queensland has lifted home investor loan rates by 0.29% effective August 10. It will have more impact on existing borrowers than new however because its “Clearpath” loans – with discount of more than 1 per cent on its variable rate – are unchanged. Most new mortgages are offered under this product, applicable to both owner occupied and investor loans and they have headroom to grow their book – allowing for the 10% speed limit on investor loans.

[Revised] APRA Data Shows Investment Growth Still Strong

Now we have the data from ANZ, we have revised the APRA data sets for the last year, to see the true position with regards to movements in the home loans portfolios. This post revises that made Friday, (though the data is correct based on the released APRA figures.

We have adjusted the ANZ and market total lines by the changes ANZ announced late Friday. As a result, ADI market growth for investment loans is 10.95% (based on the total movements over the 12 months to June 2015). A number of players remain well above the 10% speed limit.

The next charts show the portfolio movements for both owner occupied and investment loans.

Finally, here is the revised owner occupied loans data. Annual growth 6.17%. There is no 10% speed limit from the regulator, but we put the line in for comparison purposes.

A final observation, the investment loan growth depends how you calculate it, and where you draw the numbers from. Our preferred approach is to take the growth each month, and add 12 months data together to make the 10.95%. The other approach is to take the data from June 2015, and compare it with July 2014. In that case the market growth is 10.6%. Some analysts gross up the last three months to give annualised rate of over 13%. The RBA data (which includes the non-banks) shows a 12 month growth rate of 10.4% (both original and seasonally adjusted) by summing the monthly changes, or 12.4% if you take the last 3 months data and annualise that. The conclusion is that investment loan growth rates were showing no signs of slowing to June. Lets see what happens in future months. Also, consider this. APRA imposed the speed limit at 10%, but with no explanation why 10% was a good number. DFA is of the view that the hurdle rate should be significantly lower to have any meaningful impact.