The banks that won’t lend

Banks have been encouraged by the RBA to increase lending. Picture: istock

Say hello to the banks that won’t lend. Petrified by the royal commission, terrified of making a mistake … it would be entertaining, if it didn’t matter so much.

House prices are falling faster than they were during the GFC, clearance rates are embarrassing real estate agents and homeowners are holding auctions where the risk is not a no-show from bidders, but the danger of nobody showing up at all.

Despite weeks of telling us that house prices were no big problem, the Reserve Bank of Australia has just come very close to changing its tune with an unprecedented speech from RBA assistant governor Michelle Bullock publicly beseeching what she called ‘stingy banks’ to start lending again.

“Please think hard about whether your lending standards are too tight,” Bullock said at an industry function in Perth.

Too tight! This is issue affecting the banks which were dishing out loans so fast they were not checking household expenses properly. The banks that were offering 100 per cent mortgages, the banks that have left us with 25 per cent of all outstanding mortgages on an interest-only setting.

Michelle Bullock, RBA Assistant Governor. Picture: David Geraghty

Bullock’s remarkable spray at the major banks adds weight to theory that even if the RBA does soon cut interest rates, it is not going to make any serious difference unless the banks recommence lending at conventional volumes. It is the supply of credit not the price of credit that is the outstanding issue of early 2019.

Home lending is barely ticking over — for the year to December last year it was 4.4 per cent and that was down from 6.3 per cent a year earlier. The question is how bad is it going to be if we get to the end of this year with no change from the banks.

As Bullock suggested: “The appropriate amount of credit risk is not zero, banks need to continue to lend and that will inevitably involve some credit losses.”

Amid tepid numbers from the prudential regulator — the Australian Prudential Regulation Authority — lending to owner occupiers were testing historic lows during the year to December.

APRA figures for the month of January showed that lending at ANZ, for example, actually went backwards — the home loan ‘book’ fell by $300m to $178.7 billion. At the time ANZ did not disown these figures with CEO Shayne Elliott suggesting his bank may have been ‘too conservative’.

But the RBA which sees the system figures before anyone else is clearly concerned that the major banks are still not lending even at normal levels.

How this behaviour will pan out for investors in the year ahead is an equally intriguing question — the banks will not be able to lift revenues or profits in any convincing manner if they are holding back on their core business, lending to home loan borrowers.

Unfortunately, it is very much the long-term pattern in banking that the majors lend less when things start to slow down. Bullock made this point in Perth suggesting our banks are “pro-cyclical”.

The problem this time around is that we don’t even know yet if the housing slowdown is almost over or due another leg downward.