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Roger J Kerr calls for the RBNZ governor to make a pre-emptive visit to the banks to tone down their mortgage lending aggression. Your view?

Posted in Opinion

 By Roger J Kerr

Our local, Australian-owned banks have been very much in the media headlights of late with the re-branding of the National Bank of NZ into ANZ at the retail level and the healthy profits being reported by all the banks at a time when many other industries are struggling for profitability.

What is more interesting about the banking market right now is the very aggressive lending strategies all the banks are now engaging in as residential property values increase and mortgage market-share is being battled for.

Loan to value deals at 90% are back on the table and the bank will pay your legal fees as well.

In some respects, such deals being offered by the banks again to write home mortgage assets smacks of the credit boom period before 2007.

The banks were just as much to blame for NZ households over-leveraging in the pre-2007 boom years as the borrowers.

The residential real estate market is now clearly hotting up again and the banks it appears are yet again fuelling that market with aggressive lending practices.

In last week’s column one of the points I highlighted from RBNZ Governor Wheeler’s first speech was that he would use the much vaunted “macro-prudential instruments” to accompany monetary policy to control inflation and causes of future inflationary pressures:

“Additional macro-prudential instruments is just a fancy name for keeping wayward banks under control when they get carried away with credit expansion and overly-aggressive lending”

Arguably the credit aggregate statistics have not moved up sharply enough yet to cause any concern to the RBNZ, however Graeme Wheeler should be thinking about a pre-emptive visit to the banks to remind them about overly aggressive lending in the housing market which may cause him an inflation problem later on.

From the banks’ perspective there is not much new lending happening in the corporate space and rural borrowing will be slowing as incomes pull back somewhat this year.

Therefore, unless individual banks are growing home mortgage lending books their balance sheets will be contracting.

On top of these prevailing conditions, all the banks have heavily pre-funded their lending books this year from previous high-cost offshore wholesale debt issues and will be keen to get that money out the door at a positive margin.

Investing those borrowed funds in low yield Government Treasury Bills will not be cutting the mustard from a bank shareholder return point of view.

Bank Basel III regulatory liquidity requirements are coming down the track at the banks as well which will further compress their net margin returns.

The new aggression in bank lending is also as much about bank balance sheets and cost of funds positions as it is about home mortgage assets requiring less capital for RBNZ capital adequacy purposes than say corporate loan assets.

The incentives are high for the banks to grow new mortgage lending; however Dr Wheeler will know all too well that the last thing the NZ economy needs right now is a property boom distorting both investment and inflation.

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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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30 Comments

Roger, i agree with you but

Roger, i agree with you but it won't happen because too many people are making too much money out of it
 
"What is more interesting about the banking market right now is the very aggressive lending strategies all the banks are now engaging in as residential property values increase and mortgage market-share is being battled for."
Did you know that bank staff have loan targets that they have to reach?

Mike's right Roger.....the

Mike's right Roger.....the banks rule....always have.

Oh well, beats having to do

Oh well, beats having to do the hard yards of productive investment.

The banks profits seem big

The banks profits seem big but when you weigh it up in terms of ROE they are comparitable to most other industries. And it's quite a risky business, which can go bad quite fast, so it's a bit financially immature to bash the banks for their profits, especially when you consider that if they get it wrong and need help then the government has to step in with your taxpayer dollars to help them out.

Also they are quite entitled to weigh up the risks and offer products that attract customers while balancing the risk of defaults or hedging for it. Just because the banks are offering cheap loans again doesn't mean it's their fault if people rush out and chain themselves to a huge mortgage at 5% expecting interest rates to stay that low for 30 years, house prices to always go up, and someone else to step in save them for their financial folly when they can't make the payments.

The banks are not the moral arbiters of society. They are also not your friend. They are in the business of making money. As long as they don't miss-sell you something or commit fraud, it's your lookout to ensure you can meet your financial commitments.

Caveat Emptor. Take responsibility for your own decisions and stop passing the buck onto others for your own folly and/or expecting banks or the government to be your financial guardian angel.

Okay, but why should an

Okay, but why should an industry that doesn't live in open competition land but has grown large on government largesse be compared with "most other industries" who are not given privileged licenses and tax payer guarantees.
 
It does seem a little like wanting your cake and eating it too.

The unlevel playing field is

The unlevel playing field is a result of us wanting to buy things without saving first, banks wanting to maximise their return on the money that they have sitting around, and the economy having reached a point where the whole edifice needs to be monitored and backstopped by the government because it's collapse doesn't just put people out of work, it has the potential to pull our civilisation down around our ears.

It's not so much wanting our cake and eating it as not wanting our cake to collapse in a soggy mess on the floor. The expectation is that the govt will keep the banks under control so they don't take spectacular risks with our money and then fall on their arse.

However, that is different from expecting the govt to stop the banks from performing their core business (making a profit on the margin) just because some of the population are financially retarded.

Well said Stan Goodvibes! Way

Well said Stan Goodvibes! Way to go!!
The banks do as they must to survive among their peers; they're all trying to assimilate the others. Tough environment to live in.
However, they do take advantage of ignorant people who expect them to be not as they are, but as they should be. It is not the banksters that is the problem alone, gullible people play their part too. And of course, greed is at the heart of it. No use moaning about it!
Know it, use it, and be better off for it!
Hevi Groswaite

Actually the banks do a

Actually the banks do a little dance. It is called 'Line Dancing'
The idea is that the competing banks all move up and down and side to side together, they do not need to hold hands or to talk or to be directed by a conductor they simply move together in unison. The ideas behind Line Dancing explains how many markets operate.
'Line Dancing' allows for the appearance of competition without the substance.
 
 

... much like the utility

... much like the utility companies, and even the airlines

Add the telcos, or petrol

Add the telcos, or petrol companies....they dont actually have to colude, just match any move up or down....as "thats market forces at work".
regards
 

SGV - Good advice on the

SGV - Good advice on the Caveat Emptor.  Trouble for many NZ'ers is that Caveat Venditor has been given legal precedence over Caveat Emptor and people forget and some do not know how to put their own checks and balances in place. We now have the situation when something goes wrong everyone runs to Government for a solution as they are the one's who legislated/regulated each and every area of business and life.

Except of course we have the

Except of course we have the sharks on one side v "joe I not know a lot blogs"  The sharks have a huge advantage, they are amoral and know the finer legal details etc....joe blogs is nothing more than fodder...hence regulation tries to level the playing field so both sides are equal.
I can agree that now it seems excessive....(running back to the Govn).  
This rubbish over depositors should be guaranteed for instance....why cant ppl keep their eyes open....?  Everything is a risk....why should yet more enyjoy zero risk at the expensie of some innocent?
 
regards
 

Steven - I don't think it is

Steven - I don't think it is possible to be able to legislate and regulate morals! One either has them or they don't. We live in a crazy world where any Government can legally steal from an individuals efforts and that this legalised theft is a completely acceptable practice because the legalised theft somehow offers a greater benefit to others. Many people in jail for theft could justifiably argue the same principle.
 
NZ needs good legislation, regulation and policy not quantity. That is why I am in favour of the Bill of Rights Act being used as the principle document for everything. If anyone commits fraud, force or coercion against another person they would be in breach of the Bill of Rights and legal action could be taken on that basis.
 
Now....You state that you dislike the comments over the depositors guarantee. You also have made numerous comments on this site that you are in favour of taxes in just about every area and you would also support a CGT on property.
I would therefore have to conclude that you support every bit of Govt spending. Or are you indicating that Government spending is only OK in areas that you consider worthwhile. All people have different needs and as long as Govt keeps intervening in everyone's lives then they will be forced to meet most of the needs of the differing groups. I don't like the system but that is the system so we all have to live with it.
Why shouldn't the Government have a depositors guarantee? They collect plenty of tax off people and those who have savings have paid tax on their incomes and GST on their purchases etc. A depositors guarantee only adds a bit of fairness back into the current system.
 
The Govt has choices get to hell out of people's lives or meddle in everything. They choose the meddle option so therefore they have to suck it up and pay the bill as they mde themselves responsible for the people.  Its one of the ironies of Socialism.

Roger, I strongly agree with

Roger,
I strongly agree with you; albeit from the perspective of supply of money effect on the exchange rate as well as yet another damaging property bubble that you highlight.
You rightly point out:
On top of these prevailing conditions, all the banks have heavily pre-funded their lending books this year from previous high-cost offshore wholesale debt issues and will be keen to get that money out the door at a positive margin.
Those billions of dollars of euros and yen turned into NZD have certainly lifted the exchange rate, causing all the resulting trading and current account problems that I'm sure we are all aware of. It's way past time the Reserve Bank leaned on the Banks in whatever way practical to discourage them from this very damaging, unproductive money go round.
I note that the process you describe strongly supports the contention that the supply of excess foreign money coming in, rather than demand for it locally, drives the current account deficit. Stop or reduce the supply; and hey presto, the deficit is magically gone, with a lot less pain than many imagine, and a lot more long term wealth for NZers, rather than free gifts to people overseas.
 

"all the banks have heavily

"all the banks have heavily pre-funded their lending books this year "
now thats interesting.....no wonder they are asking us to fix....
Is this only the big 4 or does it include TSB, Kiwibank etc?
and if all was so well why have they pre-funded so heavily...
yeah right...
regards

.. however Graeme Wheeler

.. however Graeme Wheeler should be thinking about a pre-emptive visit to the banks to remind them about overly aggressive lending in the housing market which may cause him an inflation problem later on.
 
First, we need to know who actually controls the RBNZ.

That would be like "waiting

That would be like "waiting for Godot"....I rather go read the book than wait for Wheeler.
 
Furthermore please remember Wheeler's first speech in which he clearly marked his parameters :
 
1. NZ should stop borrowing more money : This is like asking a junkie to stop visiting his next door tinnie house. Especially when the tinnie house is both well advertised and legal.
 
2. There is nothing much he can do : There state his stand on doing nothing....(imagine the Police Commissioner saying that he will not close the tinnie house because junkie should just learn to stop being junkies)
 
3. It's not his fault if NZ refuses to follow his advise, ie stop borrowing and expecting him to do something.

At a 95 to 97% LVR and 30

At a 95 to 97% LVR and 30 year terms I think he's to late "chatting" to the banks.
I wonder how long it will be before 35 and 40 years are offered.
regards
 

Do you really think the

Do you really think the executives in charge today care what the situation is in a few years once they have left with their salaries, bonuses and cashed in their share options? The whole premise of banking self regulation is that executives would be so concerned about the long term future of their companies they would not take reckless risks. Yeah right. $10-20 million in the bank can have a very soothing effect on reputational damage.

Are we not trying to pull the

Are we not trying to pull the wrong lever here?  What are the real problems?  My view is that we have a totally disfunctional housing market resulting from artificially constrained land supply, high building costs resulting from out of control councils and monopolistic building material supply companies.  To make matters worse our ecconomic systems favours speculative investments and makes it next to impossible to run any industry.  Worse still, succesive governments have flooded the country with immigrants in the mistaken believe that this will boost the ecconomy.  (the sugar rush that they bring is very short lived and in the end the cost of their support goes onto the cost of every export item)   As a result we have the a housing investment frenzie, property bubble market risk and a whole lot of overseas borrowing to finance ridiculously over priced houses.  We need to deal with the root causes, not the symptoms.

80% LVR would be enough for a

80% LVR would be enough for a recession and bubble burst....there would be no or very few first time buyers then and hence no leverage working its way up the scale....even just 90% might do it.
25%+ would be  a  "oh god we are all going to die" airplane moment.
regards
 

Safety controls ==

Safety controls == regulations, LVR limits, CGT tax....not wanted by the voter.  So the voters pay, maybe its actually fitting punishment for our own greed....a life experience.....hard learnt.  On one level I feel sorry for ppl, but listening to them, well they dont want to listen...so maybe not to sorry.
To be fair JK and BE inherited an unsafe situation, however if they or Donny Brash had won 2005 or 2001 we'd be in the same boat with them  I'll admit. You could even take it back to Shipley and Bolger...a safety valve fitted then.....
regards
 
 
 

Not wanted by some of the

Not wanted by some of the voters- many many people have voted with their feet, risking a lot to try their luck somewhere else rather than play a game rigged against them in the country of their birth. It is a  stain on this country, and we should all be ashamed. We have created a society in a very short time that many New Zealanders do not want to be a part of.  By the way the weather in OZ has not changed that much in the last few years to explain why they are all leaving so please anyone, do not try that excuse .

This rigged game is the same

This rigged game is the same in OZ, UK, USA etc etc....sure, move, you just get hammered somewhere else.
Ashamed? on one level right now, no,  look at the greed on some ppls faces thinking they can buy up and profit for no real work or production of a good.
On another,  nope I dont feel so, Ive said ppl are being silly but frankly no one wants to listen here just as in real life Im a gloomster...Im negative....a pessimist, Im wrong...."the data isnt right", "what to mathematicians/geologists/physics ppl know" "they are all on the make"...."I just know Im right and you are wrong"  Look how deluded the Republican party / tea party is.  Why should I feel ashamed for the actions of the nut jobs?
regards
 
 
 

Put up the Core Funding

Put up the Core Funding Ratio. Easy.

I agree Roger.  Banks need to

I agree Roger.  Banks need to rein in lending and also tighten borrowing criteria as the cost of living is going up quicker than wage growth.  The problem with Australian and New Zealand banks is that they are considered boring banks on the world stage so they need to diversify a bit more like being boring in other countries in Asia and South Pacific, which I think some some are starting to do.  Banks that have less market share of the property market are likely to be better off in the future due to less exposure to bad debt.  I think due to the hight cost of living in Australia and New Zealand this will also impact on borrowing going forward and there is little we can do about it due to global money printing.