The Reserve Bank has warned banks to “resist the pressure to ease lending standards to gain market share.”
- Household conservatism is encouraged – “Ongoing consolidation of household balance sheets would be desirable from a financial stability perspective”.
- The RBA has provided special sections in the report dealing with the funding composition of banks and households mortgage repayment buffers.
What does it all mean?
The Financial Stability Review usually is a straight-forward document with few controversial issues raised. But in the latest report the Reserve Bank has been uncharacteristically forthright, warning banks against the temptation of easing lending standards too far.
The RBA notes that profit growth has slowed, credit growth is lower and there are higher funding costs. In this environment a financial intermediary may be tempted to ease lending standards to boost lending and profit growth. The RBA notes that there will be challenges in the months ahead to resist the temptation to ease lending standards too far “in the pursuit of unrealistic profit expectations.”
A number of businesses will be disappointed by the RBA warning to banks. Small businesses, and especially borrowers in the real estate segment, believe that banks are being too conservative in lending practices. The challenge for banks is to achieve an appropriate balance between risk and return that pleases the regulators and the general public.
And any thoughts that the RBA is concerned with the extent of consumer conservatism have been dispelled. The RBA notes that the “consolidation of household balance sheets” remains a positive development from a big picture perspective. Again, sections of the business community will be disappointed, especially retailers.
There is plenty of comfort in the report as well with the RBA noting that 15 per cent of borrowers are ahead in repayments by two years or more. Further, in terms of bank funding, dependence on domestic deposits is now similar to other advanced economies.
In addition the central bank also noted the pickup in appetite for debt by the corporate sector – which has grown by 6½ per cent in annualised terms over the six months to July after declining for much of the previous three years. No doubt the sharp fall in fixed and variable rates is enticing businesses to once again look at funding to accelerate investment plans.
What is the importance of the economic data?
The Financial Stability Review is published by the Reserve Bank every six months. The report is basically a health check on the financial sector but it also assesses the state of household and business balance sheets.
What are the implications for interest rates and investors?
The Reserve Bank doesn’t want banks to ease lending standards to give a boost to economic growth. The RBA is effectively saying that if there is an easing to be done, it is by us. The door certainly remains open to a further rate cut. We favour a move in November but can’t rule out some stimulus being delivered next week.
The document also highlighted the super-conservative financial practices by consumers and businesses and the ongoing deleveraging that is taking place. Interestingly the cautious nature of Aussie households has not only resulted in paying down debt at a faster pace, but also a shift away from riskier asset classes. In fact the report details the share of households’ financial assets held directly in equities (outside superannuation) has roughly halved, from 18 per cent in 2007 to 8½ per cent in March 2012.