The CBA announced a 20 percent upgrade in its expected banking income. This is on the same day that the Federal government dramatically downgrading its tax revenue. Yet it is the latter that is injecting support into the former. Something is beginning to smell here.

[DDET Wait, there’s more!]

In today’s Australian, Christopher Joye picks up the same scent.

While some of these actions may have been justified by exigent circumstances, where is the taxpayers’ pro quo?

Nowhere it seems. The banks have made no commitments to cut their otherwise high dividend payout ratios (which would give a much needed boost to the tier one capital required to bolster reserves); maintain liquidity and avoid credit rationing; moderate extreme executive pay; or to shelve their overseas expansion plans.

On the contrary, ANZ is reported to be retrenching 1000 staff with thousands more jobs forecast to be lost across the industry. Yet in the same week this decision was announced, ANZ’s chief executive was awarded 700,000 options without performance hurdles on top of his $13 million pay package.

ANZ is also understood to be rationing credit to the $3.4 trillion housing market to shore up its balance sheet prior to pursuing Asian banking acquisitions (it has already increased its stake in one Indonesian bank at a cost of circa $170 million, equity that could have supported millions more in local borrowing). Similarly, NAB’s new chief executive is looking to make investments in the US.

While ANZ has officially only cut its maximum housing loan-to-value ratio to 90 per cent, it is in practice heading toward 80 per cent. All of these actions expose the Australian economy to unnecessary risks.

And, as I wrote at the weekend, where are the journalists and the Opposition for that matter in asking these hard questions from the government? What is happening the loan-value ratios (LVRs) in the home mortgage and the commercial property sectors? Remember the point of all this assistance is to keep lending going but if LVRs are going down then we have a real problem.

Let me spell out what that problem is. Suppose, for example, one bank believes some of the hype that housing prices are due for some massive decline. What will they do? They will cut back their LVRs so that home owners and not them are wearing that risk. But for home buyers who had saved up in expectation of a 90% LVR but now find it at 80%, they have to go elsewhere. They will go to other banks. The problem is that for those banks, their average LVR rises and, even if they do not expect such great housing price declines, they may well tighten their own lending requirements. Unravelling begins and we can have some large proportion of new home buyers rationed out of the market. And guess what that means: a decline in house prices. There is self-fulfilling aspect to all this.

Now that is all well and good expect that the government is doing all it can to keep the cost of lending down for the banks. But if the banks don’t actually lend that good goes only its banks’ profit lines. That is not what credit policy should be about. And that is why the government has to gather information and monitor the situation. This is not a time for ‘tick the box’ fixes. It is a time for on-going and closely monitored economic management.

[Update: this post was published in Crikey on 3rd February, 2009.]

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