For treasurer Josh Friedenberg, this is balancing. On the one hand, he urges banks to continue lending. But on the other hand, he may be on the verge of pushing the push recommended by Heine to stricter rules that will limit the ability of banks to lend.
Friedenberg certainly wants to have complete control over the description of the government’s response to the report. The government will receive a report from the royal commission on Friday, then release it and respond to it on Monday in Canberra.
The political response to his steps will come right on Monday afternoon. The consequences for the financial sector will be the second wave, and the bank’s shares will react on Tuesday.
The electorate was equally hypnotized and shocked by the behavior of banks, property managers, and insurance companies disclosed during the year of the royal commission hearings. They want them to be punished.
They also want to see the regulations designed to ensure that this behavior does not happen again, and that from now on, ethics and people will exceed bank profits.
Whether government or opposition, doing less would be political suicide.
On many issues raised during the commission’s hearings, economic restrictions are limited by more stringent rules.
The most obvious exception is responsible lending. There is no doubt that banks should be more careful in assessing whether a borrower has the ability to keep up with interest payments. Lenders are carefully studying the costs of the borrower.
The traditional means by which banks measured spending and, in particular, the use of an external standard, Household Expenditure Measurement (HEM), was not good enough. It required a more thorough investigation of the borrower's expenses, as well as due diligence.
By most accounts, banks have raised their game – an opinion voiced by their regulator, the Australian Prudential Regulation Authority.
But Canberra is well aware that ensuring that banks adhere to the law on responsible lending (which was passed for many years, but was not adequately monitored or controlled) will further restrict lending and can have very unpleasant consequences for the economy.
As with most of the problems associated with poor financial institutions, those under scrutiny are working to get ahead of the problems and eliminate some of the underlying causes, such as reward patterns.
Compensation for affected customers is also on the train. Some institutions take correction more seriously than others.
When it comes to responsible lending, banks are not at a standstill. Currently, it relies less on HEM only, and banks are becoming more conservative with respect to mortgage lending.
The prospect of further restrictions on their ability to provide loans and their willingness to provide loans, especially during the fall of the residential real estate market, will have a negative impact on the economy.
From the Labor Party’s point of view, the answer is obvious. Opposition Treasurer Chris Bowen said in a recent interview with the Australian Financial Review that "your default position should be, if the royal commission recommends, it should be done."
Bowen argues that the current uncertainty about credit standards is the culprit, and after the release of the Hein report, banks will have an incentive to clear up lending again.
It sounds like wishful thinking.
Most likely, banks will be instructed to comply with the laws on responsible lending, carefully check borrower costs, use comprehensive credit report tools and discard the default HEM as a tool for determining the amount of a loan.
In combination with the almost complete abolition of incentive payments for staff or mortgage brokers based on volume, it is easy to see that credit growth will be under strong pressure.
Elizabeth Knight comments on companies, markets, and the economy.