Tightening of credit ‘not an overreaction’: RBA

Mr Lowe replied: “It’s true that the royal commission has had some effect on the supply of credit. Financial instructions are becoming more risk-averse, it’s understandable. They now have very little appetite for internal process failures… so they are doubling down on their processes, which is actually a good thing.

“But it does mean that there’s a change from previous process; the process for approving credit is slower and more loans are probably getting rejected than previously would have been the case.”

When asked whether he was concerned that there may be an “overreaction” from the banks in terms of tighter lending policies “stifling” loans for “entrepreneurial projects that may have otherwise gone ahead”, Mr Lowe conceded that while it is “certainly possible”, he did not believe there had been an “overreaction” at the moment.

The RBA governor said: “I don’t think there has been overreaction. There has been a reaction, but there probably needs to be some tightening up, and my hope is that we move back to something that is more sustainable than the previous set of arrangements.”

Supply and demand, not lending policy, impacting housing market

When asked by the Standing Committee on Economics whether it was important that the banks “don’t turn their ire onto consumers” and instead “spend a fair bit of time looking and examining their own conduct and their own internal processes”, Mr Lowe agreed that it was “incredibly important that they look at their whole processes from top to bottom and say how those processes [are] helping deliver good products to consumers”.

He elaborated: “They are going through that process at the moment [and] the result, I think, is that things are a bit tighter. That is inevitable. [But] I don’t think that is the main thing that is affecting the housing market or trends in credit.”

According to Mr Lowe, the main thing affecting the housing market “is the shift in the underlying dynamics between supply and demand”.

“There has been a lot of extra construction over recent years and the number of dwellings is rising more quickly than it has for a long period of time.”

The committee also heard that there has been less property demand from China, and that the level of housing prices had reached such a level “where people got to the point where they said: ‘I’m just not prepared to keep bidding and pushing the price up further’”.

“So, those dynamics changed and prices are falling and when prices are falling, investors are not as keen to go to the bank to borrow to buy, because the value of asset could be 5 per cent lower in six months’ time,” Mr Lowe said.

“So, there has been a reduced demand for credit by investors and that is having an effect on the flow of credit in the economy. In addition to that, there are these things on the supply side, but I don’t think the supply side is the main story.”

Conflicts of interest and remuneration structures in focus

Mr Lowe also told the committee that he was “incredibly disappointed” and, in many cases, “appalled at the behaviour that has come out through the royal commission”.

Using the metaphor that “sunlight is acting as a very good disinfectant”, Mr Lowe said that the revelations have brought forth two common themes.

“The first is the difficulty of dealing with conflicts of interest; they seem pervasive in the financial services sector and dealing with those conflicts has not been top of mind in many financial institutions and it should have been,” the governor said.

“Conflicts can be dealt with, they can be managed, but they need to be top of mind and if they are not top of mind in financial instructions then it continues to strain the bonds of trust between institutions and the public and there is not enough attention paid to customer service, doing the right thing by the customer. Dealing with the conflicts of interest is a priority,” Mr Lowe told the committee.

The RBA governor went on to note that the second common theme was the role that remuneration structures inside financial instructions play in driving behaviour.

“Remuneration and incentives drive behaviour and we’ve seen remuneration structures that have driven quite poor behaviour in many cases and they need to be looked at as well.

“The conflicts of interest and the remuneration structures within financial instructions seem to me to be high priorities because we need to rebuild trust, we need to have a very strong focus on delivering service, rather than sales, and risk management,” the governor said.

Mr Lowe added that that the next six months and the recommendations that come out of the royal commission are going to be “particularly important” and that the final round of hearings, which are to look at policy questions arising from the first six rounds, are “going to be critical”.

He concluded, however, that “despite all the terrible stories, Australia has a very good financial system”.

[Related: ‘Impractical’ credit rules could victimise borrowers]