Sometimes you read a document, particularly one that has interesting material in it, and react (positively and negatively) to what is in front of you. It is harder to spot what isn’t there.
After my earlier post I went out, and as I walked the streets it struck me that I didn’t think I had seen any mention of credit standards in the Financial Stability Review. I got home and checked. Searching the whole document, none of these terms appeared:
In fairness, there was a brief mention of the difference between how much banks would lend thirty years ago ( in the 1980s when banks were really only just moving into housing lending) and now, but I don’t think that really fills the bill.
At one level that wasn’t too surprising – I’ve highlighted previously how their Head of Financial Stability (and Deputy Governor) had managed to give a whole speech on housing and housing finance risks without mentioning bank lending standards. But it was pretty disappointing nonetheless. Bad loans collapse banks and financial systems. Sometimes macroeconomic circumstances turn out quite differently than anyone could have expected and even what were objectively pretty good classes of loans can get into trouble. But, mostly, the really bad losses arise from a climate in which lending standards have been pushed progressively lower and laxer. Very aggressive lending on Irish property development springs to mind, and the policy-driven deterioration in US mortgage standards.
But if it is the sort of omission we have come to expect from the Reserve Bank, that doesn’t make it any more acceptable. Surely we should expect our bank supervisors to have a good feel for trends in bank lending standards, and to be able to adduce evidence to support their view? APRA manages to, so why not our Reserve Bank. So far, they have given us no evidence of, say, a sustained deterioration, beyond the point of prudence, in the lending standards of our banks over, say, the last decade, or even just the last couple of years (the latter being the period in which they have adopted much more aggressive regulatory interventions).
Incidentally, I also checked and found that the phrases “credit to GDP” and “credit to GDP gap” did not appear – even though I’m not aware of any systemic financial crisis which has not been preceded by a recent substantial increase in credit to GDP (increases 10 t0 15 years ago don’t count). It was also a little surprising that the terms “exchange rate”, “real exchange rate” or “TWI” don’t seem to appear either, even though the thing that usually goes hand in hand with a sharp run-up in credit to GDP, in foreshadowing heightened risk of crisis, is a material appreciation in the real exchange rate. In the period 2002 to 2007 we had both – and the banks had much smaller (liquidity and capital) buffers – and yet the banks still came through unscathed.
If the Bank can’t point to detailed prudential evidence (deteriorating lending standards) or adverse trends in the big macro indicators (rapidly rising debt etc), it is really difficult to be confident that their recent regulatory actions are necessary, and well-warranted bearing in the mind the costs to individuals and businesses, in promoting the soundness and the efficiency of New Zealand’s financial system.