Responsible lending

The conventional wisdom is that banks are bastards and the discussion of responsible lending in the Royal Commission’s Interim Report seems to offer further evidence to confirm this self-evident truth.

This assessment troubles me. Not so much the banks are bastards bit, that has been a truth of the Australian perception of their banks for as long as I can remember (which is quite a long time). What troubles me is that the Responsible Lending obligation is open to the interpretation that borrowers may be relieved of any responsibility for their own decisions and indeed for telling the truth when applying for a loan.

Christopher Joye wrote an interesting opinion piece on his topic. Joye argues that the Royal Commission has adopted an “inexplicably one-eyed” interpretation of the laws that “projects the impression they are devoid of doubt” when in fact these laws are yet to be clarified by the courts. I have no particular legal insights here on where the truth lies; i.e. is the law as black and white as portrayed in the Commission’s Interim Report or more open to interpretation and clarification as Joye asserts. That I think is something to pay close attention to as the Commission plays out.

I do however share Joye’s concern with the extent to which the Royal Commission interpretation seems to create moral hazard which potentially increases risks and cost for lenders.

I think he possibly overstates the potential impact of the risk transfer on depositors. Australian bank depositors in my view are pretty well insulated from the risk transfer, partly by virtue of the Australian government guarantee of small deposits, but mostly because of the deeply senior position deposits hold in the Australian bank loss hierarchy. Joye’s comments on the extent to which this shifting of the onus of responsibility impacts the cost of bank funding are more concerning.

I am not suggesting that there is anything wrong with laws that help bank customers make more informed choices and otherwise tip the balance of power back in their favour in the interests of a fairer, more competitive market for financial services. I just don’t see that home loan borrowers are as badly done by as is often suggested. Borrowers clearly do struggle with very high house prices in the major cities but that is not the banks’ fault. The process of getting a loan and comparing offers however seems as easy, open and competitive as it has been in my memory.

I think we can probably agree that banks should not take advantage of customers were there is a power imbalance. It is less clear that banks should be held responsible for policing borrower risk appetites, including their willingness to make sacrifices to own a home, by imposing limits that are more strict than what would be required to ensure that the credit risk is sound.

It is entirely possible that I am missing something here, but I can only call it the way I see it. Banks may be bastards but that does not mean that everything they do is wrong.


Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

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