As the National Australia Bank completed the interim reporting season for most of our major banks yesterday the industry was casting a worried eye across the Tasman.
Not that there’s any suggestion of a slowdown in New Zealand where they dominate the financial system, but the Reserve Bank of NZ this week sharpened the tenor of its jawboning aimed at reining in the country’s runaway home loan boom and housing bubble.
The RBNZ warned the banking sector to tread carefully given recent its aggressive expansion on low margins and higher risk products with the spectre of regulatory controls being raised, although details were deliberately vague.
It’s the second time in three months that such a warning has been given. In March, RBNZ Governor, Dr Alan Bollard said changes to bank capital requirements may help curb lending and the housing market, helping avoid the need for higher interest rates.
The central bank went ahead and raised interest rates in late April to a record 7.75 per cent to try and control the housing boom. That increased the bank’s unpopularity.
Dr Bollard said in a summary of the first of two Financial System stability reports for 2007 that while the banking system is stable “there are significant economic imbalances which present risks for the financial system.
“The ongoing housing boom and large savings deficit in the household sector are being funded by international borrowing via the domestic banking system.”
“While global markets are currently very liquid, we should be mindful that this will not always be the case. And the longer imbalances run, the more likely we are to see a sharp correction”.
“The banks are highly competitive, but while competition is to be encouraged, the low level of lending margins has contributed to ever increasing levels of household debt and upward pressure on house prices,” said Dr Bollard.
And Reserve Bank Deputy Governor, Grant Spencer, added his bit, saying that financial indicators suggest that banks are managing the risks associated with their individual portfolios adequately. “However, it is not clear that banks are taking appropriate account of the systemic risks associated with the rapid growth in their aggregate lending.”
Dr Bollard said this financial stability risk raises the question of whether a regulatory response is needed to better manage the risks to a sound and efficient financial system.
“The increased focus on risk sensitivity in Basel II will introduce a better alignment of risk and regulatory capital – for instance, loans on higher loan-to-value ratios will command higher regulatory capital holdings. The Bank has also been considering whether the current framework should be modified in this direction ahead of the introduction of Basel II,” said Dr Bollard.
Dr Bollard concluded by noting that the best contribution to continued financial stability would be a moderation and gradual adjustment in the housing market.
“The banks should be mindful of this and be careful not to exacerbate the risks inherent in already-stretched household balance sheet.”
A toughening of the rhetoric might be a better way of putting it.
The most obvious new control, apart from interest rates now at record levels, is to re-introduce a form of reserve deposits (from years ago but still being used unsuccessfully in China by the central bank to try and cut investment).
But the RBNZ is constrained by the impression that the re-introduction of reserve deposits would leave in the markets and the wider community; of a central bank impotent, lacking clout and resorting to out dated controls.
The latest rate rise in NZ was not popular, especially among exporters and the RBNZ’s image has taken a bit of a battering.
As the fixation Kiwis have with fixed rate home lending (two and three years are very popular) and the restrictions this causes to the quick transmission of interest rate moves, cutting the fixed term to a year might be easier (but tougher politically)
The NZ banks on the whole continue showing strong profitability with low margins offset by volume growth. And the Australian parents of the big four (ASB, BNZ, Westpac and National Bank/ANZ) provide stability.
It’s the home loan and housing booms which are the concern (for everyone, it must be said, except those with older mortgages and lots of capital gain and equity in their homes).
The current housing boom has in part been boosted by intense competition between the banks (and the state owned Kiwibank).
The RBNZ seems to fear that an eventual sharp slowdown in housing may expose the banking sector to large losses, in turn exposing borrowers to the impact of recent rapid increases in debt.
A bit like China’s stock bubble, in a different sector but with the same dangers.
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If we wanted any more confirmation of how well-placed the Australian economy is at the moment, then yesterday’s labour force figures for April should have been enough.
Apart from weak housing, this week we have had a bullish but on the whole, responsible Federal Budget, and confirmation of a retailing boom without inflation from official figures and from leading department store group, David Jones.
Now we have employment in April which rose much faster than expected.
An extra 49,600 workers we
re hired in April compared to 5,100 in March. As a result the unemployment rate fell to a 32 year low of 4.4 per cent from 4.5 per cent, according to figures from the Australian Bureau of Statistics.
The male unemployment rate decreased by 0.1 percentage point to 4.0 per cent, and the female unemployment rate remained at 4.9 per cent.
The number of full-time jobs rose 11,600 in April, while part-time employment rose 38,000. About 10.4 million of Australia’s 20.8 million people are employed, according to the ABS.
More than 251,000 jobs were created in t
