Overview of poll results by Saul Eslake

October 2018

By Saul Eslake, Vice-Chancellor’s Fellow, The University of Tasmania

This month’s ESA Monash poll was prompted by the Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the ‘Banking Royal Commission’) which was released at the end of September.

The Commission’s Interim Report was highly critical of “the pursuit of short term profit at the expense of basic standards of honesty” by financial intermediaries and financial advisors. “Too often”, Commissioner Hayne wrote, misconduct was prompted by “greed” – which led to “conduct that ignored the most basic standards of honesty”.

Commissioner Hayne was also critical of regulators, observing that “when misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done”.

The Commission’s Interim Report did not make any recommendations for legislative or regulatory change. They will be forthcoming in the Final Report, which as things stand is due to be submitted by 1^st February next year.

However, as Commissioner Hayne noted in his Interim Report, “as the Commission’s work has gone on, entities and regulators have increasingly sought to anticipate what will come out, or respond to what has been revealed, with a range of announcements”.

This has in turn prompted concerns in some quarters – including, according to some reports, Treasury and the Reserve Bank – that the Commission’s recommendations, or actions taken by regulators and/or financial institutions themselves in anticipation of those recommendations, could result in a tightening in the availability of credit to Australian businesses and households.

This month’s poll therefore asked panellists two questions. First, did they agree with the proposition that “there is a significant risk that, either as a result of the findings and recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry or as a result of the financial institutions' response to those findings, credit will become less readily available to Australian households or businesses”. And second, “Assuming credit becomes less readily available to Australian households or businesses”, did they agree that “this will in turn have adverse consequences for the performance of the Australian economy”.

24 panellists responded to the poll.

Of these, 15 (or 63%) agreed (3 of them strongly) with the first proposition, that there was a risk that credit could become less readily available to households or businesses; while 4 (17%) disagreed or strongly disagreed, and 5 were uncertain. Weighting by the degree of confidence with which these opinions were held did not materially alter the outcome.

Many of those who agreed with the first proposition observed that credit standards had already been tightened, in part at the behest of regulators, over the past two years – a point which was also noted by some of those who were uncertain as to whether the recommendations expected to be made by the Royal Commission would have any additional impact. Professor Paul Fritjers, the only respondent who ‘strongly disagreed’ with this proposition, did so because, in his view, “there is no chance of the recommendations truly being taken seriously”, or, “if they were to be taken seriously … the ‘cut’ that banks take on mortgage and business loans would reduce, reducing the price of credit and hence increasing access to them”.

Only 7 respondents (29%) agreed with the second proposition, that a tightening in the availability of credit (if that were to be a result of the Royal Commission’s recommendations) would have ‘adverse consequences’ for the Australian economy. 9 respondents (38%) disagreed (2 of them strongly; and 7 were uncertain. As with the first question, weighting the responses by the degree of confidence with which they were held did not materially alter the outcome.

Those who disagreed with the second proposition typically did so because, as John Quiggin put it, “debt/income ratios are dangerously high and reducing them would be beneficial”, or, in Rana Roy’s words, channelling Paul Keating, this would be “the correction that Australia had to have”. Many of those who agreed with the second proposition, or were uncertain, nonetheless felt that even if there were some adverse consequences for overall economic growth, or for particular sectors, flowing from a tightening in credit standards, “a clean-up of Australia’s financial industry” would, as Gigi Foster observed, “have positive long-run economic consequences”. In similar vein, Jeff Sheen thought that “a more stable, fairer and safer financial system will mean less volatility about the economy’s trend”.

Some panellists criticized the propositions put in this month’s poll as “missing the point” about the misconduct highlighted during the Royal Commission’s hearings and in its Interim Report, or as (intentionally or inadvertently) adopting the position of the banks in seeking to warn of ‘unintended consequences’ that could flow from tighter regulation of the financial system that many expect the Royal Commission to recommend in its Final Report.

That certainly wasn’t the intention of the questions. Indeed, the whole point of the second question was to provide panellists with the opportunity to indicate that some tightening in the availability of credit would be a Good Thing, if they wished to – as a number of them did (half of those who agreed or strongly agreed with the first proposition either disagreed with or were uncertain about the second).

However, the release of the Royal Commission’s Final Report next February may well provide an opportunity to pose some different questions.

Finally, it’s interesting to note that the Reserve Bank has been giving considerable thought to the possible consequences of tighter lending standards. Its latest Financial Stability Review finds “little evidence to suggest” that APRA’s clampdown (since late 2014) on some riskier forms of mortgage lending – such as high loan-to-valuation (LVR) loans, interest-only loans, and loans to households with very high debt-to-income ratios – have “excessively constrained aggregate credit supply or had a significant impact on housing construction or competition for lending”; and that they have likely had “only a moderate effect on aggregate housing prices”.

Separately, the RBA notes that “a reduction in maximum loan sizes” – for example as a result of lenders being required to more accurately estimate borrowers’ expenses – “need not reduce the size of the actual loans taken out by many households” because “not many households borrow the maximum loan offered by lenders”. More specifically, the RBA reports that “only around 13% of newly-indebted owner-occupier households borrowed close to the largest loan permitted”, while “more than two-thirds of households borrowed less than 70% of their maximum loan size” and “the median owner-occupier borrower only borrowed about half of the maximum loan they could”.

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