Regulation: The case for intrusion
Banks have shown themselves incapable of safeguarding the system in which they operate. Intrusive, interventionist, expert, powerful, independent regulatory authorities are the answer.
Since last month, banks in Singapore have taken a new conservative approach to lending into the buoyant local property market. For buyers with one or more outstanding housing loans already, banks have reduced the maximum loan-to-value ratio on new mortgages from 80% to 70% and have doubled the initial cash payment required from 5% to 10%.
It seems a prudent move. While the Singapore economy performed strongly in the first half of the year, the many uncertainties besetting the global economy carry obvious risks for property prices, while record low interest rates cannot continue indefinitely.
And banks in Singapore have another good reason for adopting this new moderation in lending. The Ministry of Finance and the Monetary Authority of Singapore have ordered them to do so.
How are banks to know whether or not other lenders have already advanced loans to new mortgage applicants? The authorities in Singapore require them to check this through third-party credit bureaux and the country’s public housing authority, the Housing and Development Board.
The government of Singapore wants to ensure a stable and sustainable property market where prices move in line with economic fundamentals.
Don’t tell the MAS it can’t do anything to spot or deflate an asset price bubble: that’s its job.
It’s not the only Asian regulator to be so bold. Earlier this year, the head of banking supervision at the Hong Kong Monetary Authority told Hong Kong banks that he had noticed that some banks were offering new mortgage products with very attractive terms, including high cash rebates. The HKMA curtly reminded banks of its guidelines on how they should set mortgage rates at sustainable long-term levels with a reasonable margin for credit and other costs and manage the basis risk on the spread between their own prime rates and associated discounts for mortgage borrowers and Hibor.
This is hands-on, interventionist banking regulation that muscles its way into competitive markets and dictates pricing and other terms. And this is the way it works in many of the larger banking markets that dodged the worst of the sub-prime mortgage and structured credit securitization fiasco that cratered the banking systems of the US, UK and continental Europe.
Many senior bankers seem to be falling over themselves to invite such regulation by close supervision rather than through the endlessly modified metrics and ratios now once again being concocted in Basle.
Emilio Botín, chairman of Santander, in a speech at the III international banking conference in September, while recognizing efforts in the US and Europe to enhance so-called macro-prudential supervision through new bodies mandated to supervise systemic risk, also pointed out that the quality of supervision in Canada, Brazil, Mexico and Australia already offers a benchmark to the US and Europe. The politic Botín adds Spain to that list, reminding us of the Bank of Spain’s decision in 1999 to compel banks to set aside generic provisions that provided €18.2 billion for them to draw down from January 2008 to alleviate the worst impact of the financial system crisis.
Regulators realise that they must recover processes for evaluating emerging risks and for changing the rules through the cycle to constrain credit booms. The toolkit to achieve this hasn’t been defined but it must include both counter-cyclical capital buffers and the power to impose limits on allowable contracts – loan-to-value ratios and even pricing – at regulated banks.
It is a shame that in the most developed financial markets the debate has not advanced further, especially in light of the good examples in many emerging markets. Instead, policymakers seem to be still bogged down in irrelevance. Michel Barnier, the EU commissioner for the internal market, has put himself at the centre of an argument on how best to administer tax levies on banks in such a way as to pre-fund their bailouts at the next inevitable crisis. This is supposed to protect taxpayers. It does nothing of the sort. The cost of banking crises is lost output, not the financial price of providing rescue capital.
The assumption behind Barnier’s approach merely increases moral hazard and might even incentivize banks to take excessive risks with the comfort that a fund to bail them out exists. It also, as Botín points out, fails to distinguish between the prudent and the poorly managed.
Banks have shown themselves incapable of safeguarding the system in which they operate. Intrusive, interventionist, expert, powerful, independent regulatory authorities are the answer. Bankers can avoid tax, overpay themselves, and find their way around every rule and ratio. They must learn to fear the regulator’s letter that begins politely: ‘It has come to our notice that...’