Making the RBA the People’s Bank would shake up the big four – so it’s worth a try | Greg Jericho

On Wednesday the Greens leader, Richard Di Natale, proposed the creation of a People’s Bank in which customers were able to borrow from the Reserve Bank. The proposal is being pitched as a housing affordability measure, but in reality the impact would be limited. And yet the possible wider economic benefits make it a policy worth considering.

The idea of a People’s Bank is not a new one. In 2009 a group of economists, including Joshua Gans, Nicholas Gruen and John Quiggin, argued for a public entity – operated through Australia Post – that would offer basic savings, payments and wealth management products.

Which bank? Richard Di Natale says Australia needs a ‘People’s Bank’

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Last year Gruen argued for the Reserve Bank to compete for home loans and superannuation.

He argued that we don’t really have a private banking sector – it is a “public-private partnership” given the RBA operates in effect as the wholesale supplier to the banks and is “effectively guaranteeing their debts if they can’t meet them”. The banks then “upsell” RBA services back to us.

His analogy is that while the internet has meant consumers are able to deal directly with the wholesaler and get great benefits (such as buying a plane ticket from the airline’s site rather than a travel agent), in banking we still operate as though the split between wholesaler and retailer is set in stone.

And that split is, to say the least, quite profitable for the retailers.

Consider that the cash rate is now 1.5% points below the 3% bottom that occurred during the GFC. But the current average mortgage rate for owner occupiers is just 0.55% points below the bottom reached in 2009:

Cash rate and standard variable mortgage rate

0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%2000200220042006200820102012201420162018

Cash Rate

Standard variable (Owner-occupier)

Cash Rate

Standard variable (Owner-occupier)

Chart: Greg Jericho Source: RBA Get the data Created with Datawrapper

Prior to the GFC, the average standard variable mortgage rate was just 1.8% points above the cash rate; now it is 3.7% points. For small businesses it is even worse – the average small-business overdraft loan has shifted from 3.85% points above the cash rate to now 7.15%points:

Difference between loan interest rates and the cash rate

0.00% pts1.00% pts2.00% pts3.00% pts4.00% pts5.00% pts6.00% pts7.00% pts19982000200220042006200820102012201420162018GFC

Standard Variable – owner occupier

Small business – small overdraft

Standard Variable – owner occupier

Small business – small overdraft

Chart: Greg Jericho Source: RBA Get the data Created with Datawrapper

Yes, the cost of financing has increased since the pre-GFC times of cheap money, but it has not continually become more expensive for banks to raise finance, despite the increasing margin between the cash rate and their loans.

The Greens proposal – which follows that advocated by Gruen – is for the RBA to lend up to 60% of the value of a home loan to owner occupiers at the cash rate plus 0.5% points. The rest of the loan would be covered by having a 40% deposit or by borrowing from a commercial bank.

Now clearly, this would distort the market. Gruen suggested last year that such a proposal would see “blood on the streets” as the banks would fight hard to protect their businesses.

The reality is the current home loan market doesn’t have much competition. In February, the big four banks accounted for 81% of owner-occupier home loans and 85% of investor loans:

Home loans held by Australian banks (Feb 2018)

Owner-occupiedInvestment

Created with Raphaël 2.1.2

Rest

100,000

$200,000m

CBA

Westpac

ANZ

NAB

ING

Suncorp

Bendigo & Adel

Mac

Bank of Qld

ME Bank

Rest

Chart: Greg Jericho Source: Apra Get the data Created with Datawrapper

Now this in itself is not a great concern. Certainly our top five banks account for an above-average slice of the market compared with other nations, but other nations have a bigger share controlled by the top three banks than does Australia:

Market concentration of banking sector – OECD

3-firm Concentration5-firm Concentration

Created with Raphaël 2.1.2

20

40

60

80

100%

Iceland

Estonia

Finland

Norway

Sweden

Switzerland

Belgium

Netherlands

Portugal

Denmark

New Zealand

Israel

Germany

Hungary

Canada

Spain

Slovak Rep

Ireland

Greece

Czech Rep

Australia

France

UK

Austria

Italy

Slovenia

Poland

Japan

USA

Luxembourg

Source: Grattan Inst, Fig 2.1 Get the data Created with Datawrapper

But just because the system is not out of the ordinary doesn’t mean it is not in need of a shake-up.

The concern is the impact of the policy.

The Greens propose limits the loan size to $500,000 – which is currently just above the $450,000 average owner-occupier mortgage in New South Wales, and well above the $400,000 average mortgage size in Victoria – and also offers it only to those with no other property holdings.

This would limit its impact on housing prices – especially if combined with the removal of first-home buyer grants.

Given as well such loans would not be available for investors, it would involve owner occupiers being able to operate more equally with those who are valuing their ability to purchase on the basis of using negative gearing and capital gains tax discounts.

But while the Greens are pitching it as a housing affordability measure, as a demand side measure it would see an increase in prices of houses to account for the ability to borrow more.

Also, given the 60% cap it would benefit most those who could raise a 40% deposit and not have to go to a commercial bank for the other 30% to 40%, which would likely be at a higher rate than is currently offered.

Overall, the amount repaid on the loan might be smaller but the initial affordability improvement would likely be minimal. And the issue at the moment with housing affordability is not the loan repayments but the initial hurdle of the deposit and the price of the house.

Nicholas Gruen does not really pitch this as a housing affordability measure but an economic reform that would put the money supply more in the hands of government, make the bank system more efficient and more akin to a public utility, and which would raise revenue – possibly around $10bn a year at the current cash rate level.

The housing boom is over – and the RBA isn’t busting to raise rates | Greg Jericho

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He suggests such a change could lift our GDP by up to 3% due to this increased revenue not actually being a tax increase but just shifting money from banks to the government, and it then also being able to allow other tax cuts.

But it would also mean the RBA would be the major player in a system in which the central bank itself is the lender of last resort and regulator.

How would this affect the stability of the system – because surely the commercial banks would face higher lending costs given the most stable side of their business has just been sliced away? Would the RBA’s lending standards be maintained – and who would ensure that they are maintained? How would it affect Australia’s credit AAA rating?

All of these questions, coupled with the extreme level of banking lobbying that would occur, do make it a politically toxic proposal. But just because it might upset the status quo of the financial system and anger the hell out of the big four banks, does not mean the policy should be dismissed out of hand. Indeed that very anger alone possibly makes it worth considering.