Thursday, September 20, 2007

Should Australia's banks jack up their mortgage rates?

The Reserve Bank Governor says he would understand.

The Treasurer says

Below the fold are the two stories I wrote.

Personally I would side with the RBA Governor. The banks can do what they like. They get 40 - 60 per cent of their mortgage funds from securitisation, which has become more expensive.

Are any Australian banks or non-bank lenders at risk of going under?

I'm writing a piece about that right now.

Wednesday September 19

The head of the Reserve Bank has warned of even higher interest rates in the months ahead amid rumors that at least one Australian financial institution is under severe stress.

The Adelaide Bank, which is in merger negotiations with the Bendigo Bank yesterday had to deny rumours that it had sought extra funds from the Reserve to bolster its capital.

The Reserve Bank’s deputy governor Ric Battellino also dismissed the speculation.

The rumours knocked 7 per cent of the Adelaide Bank’s share price and 4.5 per cent of the Bendigo Bank’s share price. Shares in RAMS Home Loans lost a further 4.5 per cent to close at 75 cents, just a fraction of the $2.50 price it listed on the exchange at just six weeks ago.

Overnight Monday the Bank of England took the unusual step of guaranteeing deposits in the UK lender Northern Rock after its share price plummeted 35 per cent as customers queued up to withdraw their money.

In Sydney the Reserve Bank’s Governor Glenn Stevens told a business lunch that the “good times” of easy credit had vanished for the time being.

He said the market for the asset-backed commercial paper used by mortgage providers to fund loans had “virtually came to a standstill”.

Financial organisations were “operating on an impossibly short timeframe, out of fear of what tomorrow might bring.”

To remain in business some lenders would have to charge more.

“Some borrowers are being asked to recognise this higher cost in the rates they pay for their loans, a trend that will continue if the higher funding costs persist,” he said.

"It appears, at this stage at least, that we may well observe a further tightening of financial conditions in the Australian economy in the months ahead.”

Last week the Adelaide Bank lifted the rate on its low-doc loans by 0.30 per cent.

The Reserve Bank has lifted its target cash rate nine times since 2002, five of them since the last election.

Mr Stevens said that until the US financial crisis the interbank rates Australian banks charged each other had closely hugged the Reserve Bank’s target rate.
The Reserve was still managing to meet that target, but interbank rates had shot up as much as 0.50 percentage points above it.

In an expression of concern he said while the Reserve did not set interbank rates “we can and do take account of how the margin between these rates and the cash rate alters”.

On Monday the Bank widened the range of assets against which it would lend to banks in order to give the financial system “some additional confidence that quality assets can be turned into cash if needed.”

“From our point of view, this means accepting a little more private credit risk in our operations, but we have been moving in that direction anyway for years,” the Governor said.

Absent from the Mr Stevens remarks was any hint that the Reserve Bank was considering tightening its cash rate in November as had previously been thought likely.

He said while readings of the Australian economy since the Bank last tightened rates in August were “at least as strong as the Board’s assessment at that time, with few signs of that momentum slowing” global growth might now turn out to be weaker than had been thought and that this “would perhaps not be unwelcome”.

“This episode may have some time to run. But the sooner the exposures to problem assets are accounted for and disclosed, the sooner markets can get back to pricing risk prudently and providing credit on sensible commercial terms.”

The Open Market Committee of the US Federal Reserve was due to meet early this morning Australian time to decide whether to cut interest rates in order to shore up US financial institutions.

An Australian banking analyst Brian Johnson of JP Morgan warned yesterday that mortgage stress was climbing dramatically and flowing into middle-class households.
He said around 600,000 Australian households - eight per cent of the home lending market - were suffereing some sort of stress which he defined a change in behaviour as a result of increased repayment obligations.

He said many were borrowing on credit cards to meet mortgage payments.

A University of Western Sydney economist Steve Keen said mortgage obligations were set to reach crisis point in less than two years with Australians becoming addicted to debt and set to face a repayment burden similar to when interest rates stood at 17 per cent in 1990.

The Treasurer Peter Costello warned Australians not to be complacent.

“You are seeing a huge fallout in international financial markets brought on by poor financial regulation in the world's largest economy, the United States,” he said.

"It has affected some of the mortgage originators who have already put up their lending rates."

"It has affected some of the stock market, it has even affected the currency. It is not over yet."

Thursday September 20

The US Federal Reserve yesterday sparked a wave of euphoria on worldwide financial markets, cutting its key federal funds rate by twice as much as had been expected.

The cut, of half of one per cent to 4.75 per cent, was described by the Macquarie Bank’s Richard Gibbs as “the most decisive single event rate cut ever seen”.

It sent the both the US and Australian share markets up 2.5 per cent and saw the Australian dollar climb almost two and a half US cents to 83.04.

But the jubilation was mixed with concern that aggressive move might signal that the Fed believed the US economy was in worse shape than had been thought.

It came just days after the Bank of England guaranteed the deposits of a large private lender Northern Rock, in order to keep it afloat.

The Treasurer Peter Costello said there was risk that the financial turmoil could spread to Australia.

“We will be watching very, very carefully the fallout from this instability. We will be watching very, very carefully as to how this flows in the real economy. And the thing that I would say is we have to be on our guard here in Australia, we are not immune, totally immune from international events.”

Asked about the financial health of the Adelaide Bank, under pressure after rumors, strenuously denied, that it was short of liquidity the Treasurer said that Australia had a strong regulatory system and that Australian banks were very profitable and well capitalised.

He said the turmoil meant that some of Australia’s non-bank lenders would have to increase the rates they charged.

“For some of the mortgage originators it means that they will have more difficulty raising money and they will raise it at higher prices and they will pass on those prices to borrowers,” Mr Costello said.

However he took issue with the Governor of the Reserve Bank Glenn Stevens who in a speech on Tuesday signaled that Australian banks might have to increase their mortgage rates as well.

“There is no reason whatsoever for the major banks to lift rates to housing borrowers,” the Treasurer said.

“The Australian banks are highly profitable and well capitalised. There has been no movement in official interest rates. It is true that for those institutions that borrow a lot of money in the United States the costs have gone up. This applies to mortgage originators and they will be charging some of their customers higher rates. But the Australian banks with strong deposits, strong profitability and strong capital in a very strong economy have no reason whatsoever in the light of this to move housing borrowing costs up.”

The ANZ bank said yesterday that it was more likely to cut its mortgage rats than to lift them, telling analysts that it was aiming to increase its share of the Australian mortgage market at the expense of other providers.

The bank’s head of retail banking Brian Hartzer told an analysts briefing that the global credit crunch was costing it $20 million per month but he said he did not think it would “sustain itself over the long term”.

But the head of low-doc loan specialist Bluestone, which has increased some of its rates by 0.30 per cent, said he expected others to follow suit.

“All lenders, regardless of their funding mix, regardless of whether they're a bank or a non bank, are reviewing exactly this point now,” the chief executive Alistair Jeffery said.