Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Risk of credit crunch in overregulation, says Morningstar

Emma Rapaport  |  02 Oct 2018Text size  Decrease  Increase  |  
Email to Friend

Australia could be staring down the barrel of a credit crunch, triggered by the simultaneous softening of borrower demand and implementation of stricter lending criteria following the banking royal commission. 

Morningstar senior banking analyst David Ellis said the potential for a "credit squeeze" sparking an economic downturn is the biggest risk for the big four banks, which could develop into a "credit crunch".

"If this occurs, it would have serious impacts of the economy, house prices and unemployment," Ellis said in reaction to the release of the interim report last Friday of the Kenneth Hayne-led royal commission into misconduct in the banking and finance industry.
UBS banking analysts echoed the fears of tighter lending rules.

housing picture royal commission

'A credit crunch which will lead to a recession – lower house prices and unemployment'

In a note to clients, UBS estimated that a move to full expense verification is "likely to reduce maximum borrowing capacity by 30 per cent," adding that the tightening of underwriting standard is a key risk to the banks, the housing market and the broader economy.

Verification calls for more than taking the consumer at his or her word, Hayne said in his damning 1000-page report, dismissing bank arguments that verifying a consumer's outgoings is too hard.

UBS analysts said Hayne's statements show banks' attempts to validate borrower expenses by increasing the number of expense categories they collect during a loan application still does not constitute verification.

UBS estimated current improvements and tightening of underwriting standards by the banks have already reduced maximum borrowing capacity for owner-occupiers by 7-10 per cent and by about 20 per cent for investors.

"Therefore, there is likely to be a further substantial tightening in maximum borrowing capacity to come."

Balanced response is crucial, says Ellis

Ellis says it will be on the government of the day – whether the Coalition or Labor – to ensure a balanced response to the royal commission.

"Any federal government will need a strong, robust banking system to ensure economic growth," Ellis says.

"If they overregulate the system they run the risk of triggering a credit crunch which will lead to a recession – lower house prices and unemployment. A bad outcome for everyone."

On the interim report itself, Ellis said he was pleased to see Hayne's broad recognition of the importance of the banking system to the Australian economy, and that blame was being heaped on industry regulators – the Australian Securities and Investments Commission and The Australian Prudential Regulation Authority – rather than the adequacy of the laws themselves.

"Ample criticism was levelled at the regulators – ASIC in particular – for being soft, complacent and rushing to a negotiated settlement, rather than a legal response," Ellis says.

"The commission acknowledged that laws as they stand today are sufficient to regulate the sector, and that adding an additional layer of complexity was of little benefit. Rather, stronger enforcement is needed."

For investors, Ellis predicts a continuation of heightened levels of uncertainty for bank stocks and can see no major positive catalyst for the earnings in the next six to 12 months.

"What surprised markets on Friday was no specific recommendations given in interim report – just a lot of questions," he says.

Bank shares slide

The Australian share market slid further at noon as the embattled banks extended their losses.

In Tuesday trading, the financial sector has been the heaviest drag on the market, dropping to its lowest point since June as the blows from report began to bruise.

The big four - Westpac (ASX: WBC), Commonwealth Bank (ASX: CBA), ANZ (ASX: ANZ) and NAB (ASX: NAB) - were down between 0.94 and 1.26 per cent at noon, while Macquarie Group (ASX: MQG) was down 1.39 per cent.

AMP (ASX: AMP) shares were down 1.6 per cent to $3.07 following news corporate watchdog ASIC is preparing to launch the first royal commission-related legal action against the wealth manager over the fees-for-no-service scandal.

 

More from Morningstar

Fears bank inquiry will affect borrowing levels

Global Market Report - 2 October

Make better investment decisions with Morningstar Premium | Free 4-week trial

 


Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is an editor for Morningstar.com.au

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend