Post-coronavirus deposits are safe with the banks, and debt for property is not a huge risk, say regulators
Regulators have moved to assure nervous depositors their money is safe with the banks, and households are generally not being speculative by taking on more debt to buy property.
If a more severe downturn eventuates as a result of the coronavirus pandemic, they say regulators and the Federal Government would need to step in to protect deposits and inject even further economic stimulus.
On Thursday, a Senate inquiry rejected a controversial bill introduced by One Nation Senator Malcolm Roberts to make clear that failed banks cannot bail-in Australians’ deposits in the event of a financial crisis.
The report came as the Reserve Bank released a discussion paper on Australia’s rising levels of household debt, saying that “banks appear resilient to a severe downturn”.
The RBA paper, “How Risky is Australian Household Debt?’, suggested “only a small portion of the rise in indebtedness being either unaccounted for or related to potentially more speculative factors”.
This, it said, was in part because debt is not concentrated among households with high loan-to-valuation ratios.
“In fact, most of this debt is held by households whose risk of unemployment is relatively low, while households that are most at risk of experiencing very large changes in asset values (relative to income) tend to have little leverage,” it said.
Nevertheless, rising household debt still posed financial risks, the paper warned.
“Our model cannot account for the increase in [household] debt over the past four or five years,” the RBA paper said.
A “large but plausible” fall in asset prices could lead to a substantial fall in consumption.
“The increase in indebtedness over the past decade has slightly increased the potential loss of consumption during periods of financial stress,” it said.
40pc house price fall ‘extreme but plausible’
The RBA paper specifically referred to the findings of series of recent bank “stress tests” in Australia conducted by APRA and the International Monetary Fund (IMF).
It said these stress tests showed that Australian banks are “well placed to handle a severe downturn in the economy”, but that households could “still significantly curtail their consumption in response to a severe recession”.
Some of these tests looked at a hypothetical scenario involving employment falling by 8 per cent and housing prices falling by 40 per cent.
“We believe this is an extreme but plausible scenario, which is broadly in line with the shock experienced by some countries during the global financial crisis,” the RBA paper said.
“The employment fall is similar to the fall Australia experienced during the 1990s (7 per cent fall in employment-to-population ratio) and during the COVID-19 pandemic (7 per cent fall as of June 2020), but is significantly more extreme than during the global financial crisis.”
It said the housing price fall considered is more extreme than the 1990s (20 per cent fall in real housing prices) and during the global financial crisis.
But it was comparable to falls experienced in countries that were heavily affected by the crisis, including the United States (32 per cent fall), Spain (37 per cent fall) and Ireland (55 per cent fall).
The RBA said its findings confirm that Australian household indebtedness has important policy implications but they are sometimes “misconstrued”.
“The level and growth of household debt reflects high incomes and direct ownership of rental housing, not evidence of widespread excessive leverage,” it said.
“Household borrowing is a large share of banks’ assets and so is important for their performance, but overall high lending standards, low loan-to-valuation ratios and banks’ high level of capital mean they are highly resilient to adverse shocks to households.”
But it still warned the need for policy intervention in the case of a more severe downturn.
“The implications for consumption of household indebtedness are an important mechanism to take into account when targeting macroeconomic policy to respond to economic shocks,” it said.
Bail-in Bill gets rejected by Senate inquiry
On Thursday, the Senate Economics Legislation Committee also released its report on Senator Roberts proposed law change called the Banking Amendments (Deposits) Bill 2020.
The Bill, which in Senator Roberts’ words was designed to stop “failed banks taking our money” was referred to the committee in June.
Hundreds of submissions to the inquiry suggested there was a legislative loophole that gives banking regulator, Australian Prudential Regulation Authority (APRA), the power to “implement, authorise or direct bail-in to deposit accounts”.
But the committee, chaired by Senator Slade Brockman, dismissed that view.
Its report cited submissions from Treasury, APRA and the Reserve Bank indicating that “there is already legislative certainty that deposits cannot be subject to any form of conversion, write-off or bail-in”.
“This is because the Banking Act contains several explicit provisions that expressly rule out the possibility of any form of conversion, write-off or bail-in of deposit accounts,” the Senate inquiry report said.
“The committee notes the concerns expressed by submitters that their bank deposits might become subject to bail-in should a financial institution become unstable.
But it said the Banking Act was not well understood by the public, nor were APRA’s priorities and powers.
“In the unlikely event of financial crisis, the Government’s overwhelming efforts would be directed towards stabilising the financial system,” the report said.
Under the Financial Claims Scheme, Australians’ savings with authorised deposit-taking institutions (ADIs) are guaranteed for deposits up to $250,000 per institution.
Senator says committee ‘ignored’ 190 submissions in favour of the Bill
But a dissenting report by Senator Roberts said the committee ignored 190 submissions in favour of the Bill and instead relied on advice from the Treasury and the APRA in favour of the status quo.
He said if the Senate Committee believed the Bill did not pose any adverse outcome and seeks simply to reaffirm the meaning of the legislation currently in place, then there was no reason not to pass it.
He said the entire premise of a bail-in, is to save the bank and maintain financial stability — which is a core part of APRA’s role.
“This can occur without long term loss to depositors’ funds that were forcibly exchanged for shares in the bank,” Senator Roberts said.
“Those shares will most likely regain their value years later.”
He also noted the $250,000 guarantee triggers once a bank fails and has to be activated by the Treasurer.
“The committee is relying on a scheme that is not active, may not be active, may be activated after a bail-in and is not funded,” Senator Roberts said.
The committee had also not taken into account an IMF view that the emergency powers in the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 have primacy over the provisions of the Banking Act.
He said the Government’s 2014 Financial System Inquiry final report acknowledged: ‘Inevitably, failures can and will occur, the system will be exposed to crises and, at times, unsecured bank creditors will be exposed to loss’.