RBA governor Philip Lowe ‘incredibly disappointed’ and ‘appalled’ at bank behaviour

The head of the RBA says he is ‘appalled’ by behaviour unveiled by bank inquiry as he flags ‘problematic’ US policy.

RBA Governor Phillip Lowe says he has been “incredibly disappointed” and “appalled” by the conduct of the nation’s banks exposed in the banking royal commission as he weighed in on the outlook for the domestic and international economy.

Dr Lowe told the House of Representatives economics committee today that the royal commission had highlighted deficiencies of trust, customer service and risk management in the conduct of the banks.

He said dealing with conflicts of interests in the banking sector must be a priority in the response to the royal commission.

Dr Lowe said bank remuneration structures had also played a role in driving bad behaviour, and must be dealt with.

He said the royal commission was having an impact on the availability of credit, with the banks intensifying their internal checks on borrowers, and rejecting more loans as they became more “risk averse” and the process for approving credit slowed.

“More loans are probably getting rejected than would previously have been the case,” he said.

However, he said it was important for the future that banks looked at all of their processes “from top to bottom” and ensured that they were delivering good products to consumers.

Dr Lowe said he welcomed the revelations of the commission, saying “sunlight is acting as a very good disinfectant”.

The RBA governor went on to note: “I think we’ve seen a couple of common themes right through the royal commission. The first is the difficulty in dealing with conflicts of interest. They seem pervasive in the financial services sector and dealing with those conflicts has not been top of mind in many financial institutions and it should have been, I think those conflicts can be dealt with, they can be managed but they need to be top of mind and if they’re not top of mind in financial institutions, then it continues to strain the bonds of trust between the institutions and the public.

“There’s not enough attention paid to customer service and doing the right thing by customers so dealing with the conflicts of interests is a priority.

“The second common theme that I’ve detected through the hearings is the role that remuneration structure plays within financial institutions.

“We’ve seen remuneration structures that have driven quite poor behaviour in many cases and they need to be looked at as well.

“We’ve talked at this committee about what I see as the foundations of finance which are really trust, delivering service and good risk management in financial institutions.

“I think what we’ve seen through the Royal Commission is deficiencies in all those three areas, the trust between the community and financial institutions has been strained, there has not been enough focus on customer service — there’s been more of a sales mentality rather than a service mentality and risk management has not been all that it should have been in financial institutions.”

The comments came after he told politicians in his opening statement that the next move in interest rates is likely to be up, but “it is likely that we will hold steady for a while yet” and as he noted the RBA was becoming increasingly uneasy about the potential for inflation to jump in the US, fanned by the country’s “problematic” fiscal expansion.

“I am less relaxed. It is highly unusual to have such stimulatory fiscal policy when the economy is already operating at a very high level of capacity,” Dr Lowe said in testimony before parliament.

“One can’t rule out the possibility that the Federal Reserve will have to withdraw monetary accommodation more quickly than currently projected, with possible disruptive consequences in financial markets,” he warned.

Markets are not prepared for a repricing of Fed intentions, but the “probability of it happening is rising,” Dr Lowe said.

“With the US economy doing well, and very low unemployment, it is the time of the cycle that should be back to budget balance ... building insurance,” Dr Lowe said while pointing out that the US was doing exactly the opposite.

The US is planning to run budget deficits between 4-5 per cent of GDP into the foreseeable future and added that US public debt was already high.

Dr Lowe also expressed concern that a trend toward fiscal expansion was spreading among major economies.

“We are also seeing a similar trend emerge in other countries, where governments, responding to the disillusionment in the electorate, and the international tax competition coming from the US, are feeling they have to respond,” Dr Lowe said.

Among OECD economies, more than half are having a fiscal expansion this year at a time when the world economy is doing well and unemployment rates are low and levels of pubic debt are very high, he added.

On the domestic front, Dr Lowe said the Australian economy continued “move in the right direction”, with GDP growth at 3.1 per cent, inflation at around 2 per cent and unemployment rate now below 5.5 per cent.

He said the global outlook remained positive, although escalating trade tensions posed a risk to investment.

Dr Lowe said housing prices had “clearly slowed”, reducing demand for credit.

He said the RBA was closely focused on wage growth, which as forecast to “pick up gradually over the next couple of years” as the labour market tightened.

He said this was already beginning to happen in some sectors, including construction.

“Even so, the pick-up in wages growth is still expected to be fairly gradual. We still have some spare capacity in the labour market, including part-time workers who would like more hours,” Dr Lowe said.

He said inflation was expected to move gradually higher over the next few years as the economy strengthened.

The Reserve Bank Board has held the cash rate steady at 1.5 per cent since August 2016, with the last increase in the rate in 2010.

“The Board’s view is that it is likely that we will hold steady for a while yet,” Dr Lowe said.

“It is likely to be some time before we are at full employment and the inflation rate is comfortably within the target range on a sustained basis. We are prepared to maintain the current monetary policy stance until these benchmarks are more clearly in sight.”

Australian businesses were also warned to prepare for a “whole range of circumstances” and reminded of the need be diversified, as risks appear in the global economy. With Dr Lowe noting that while the global outlook was “positive”, several risks had increased. “The only advice I give is be diversified and be prepared for a whole range of circumstances,” Dr Lowe told the hearing when asked about what Australian businesses should do.

Dr Lowe said advanced economies around the world were growing faster than trend, and jobless rates were, in some countries, at lows not seen for decades. However, some businesses were delaying investment because of uncertainty over global trade tensions.

“It is possible that this becomes a more general story. If this were to occur, this could be the channel through which the trade tensions sap the current positive momentum in the global economy,” Dr Lowe said.

As well, Argentina, Brazil, Italy and Turkey had “vulnerabilities” which could further stress global financial markets, he said.

Discussing trade, he said countries did not make themselves wealthier by building barriers.

The most likely scenario on the trade front was a situation where 10 to 25 per cent tariffs were imposed by the US and China which slowed growth but did not derail global expansion.

“It is manageable,” he said.

The much worse scenario was an escalation in trade tensions, coupled with jittery financial markets.

“That could be a very damaging cocktail which sees world growth slow a lot.” Under the “rose coloured glasses” scenario, it was possible tensions between the US and Europe led to some trade liberalisation, the rethinking of NAFTA led to further integration and under pressure the Chinese did more to protect intellectual property.

with Dow Jones, AAP