Wallis not Joyris, the Yellow Brick Road duo

In recent weeks the dynamic duo of Mark Bouris and Christopher Joye of Yellow Brick Road have argued hither and thither for a dramatic shift in the rules that govern the Australian financial system. They have recently appeared in the ABC, Australian Financial Review and The Australian to propose that the Australian budget should be deployed as a guarantor for pools of mortgages aggregated from all banks and non-bank lenders.

They propose this as a solution to the competition woes afflicting the current system, which guarantees individual banks, privileging the large over the small. Here is a sample from their recent AFR article:

The real trouble with this banking system is that it’s based on a flawed paradigm: a purported conflict between stability and competition, which the big banks highlight when justifying their margin expansion.

Yet these two objectives are, in fact, complementary. The financial system would be safer if we had 10 smaller banks worth $25 billion each, so that none is individually big enough to threaten the system’s viability compared with the four too-big-to-fail behemoths, worth about $250 billion combined, that we have today …

When extending liquidity and insurance to banks, Treasury or the RBA should not rely on ratings agencies. The Australian Prudential Regulation Authority monitors and controls every bank’s risk, and the cost of taxpayer support should be APRA’s intrusive regulation, and thus priced the same for all institutions.

In preference to guaranteeing nebulous ‘institutions’, taxpayers should focus on insuring safer assets. If the government offered a credit-wrap of mortgage loss insurance like the Canadians do, it would formally price an implicit guarantee that already exists (generating substantial revenue) while levelling the playing field …

Finally, why not require all banks to publish a regular index of their funding costs and net interest margins to end the asinine monthly RBA rate debate. We’re surprised the majors haven’t offered to do so.

Bouris and Joye have done a great job of describing the distortions of the current system. I agree and recommend you read their articles. What makes me nervous, however, is their proposal to use the government’s balance sheet to purchase pooled mortgages and resell them to investors as AAA-rated government-backed bonds, thus providing banks and other mortgage lenders with an immediate source of cash that they can re-lend.

As they mention, the approach championed by Bouris and Joye is effectively the system currently in place in Canada via the government-owned Canadian Mortgage Housing Corporation (CMHC), as well as the process employed by Fannie Mae and Freddie Mac, which exposed US taxpayers to huge losses when the US housing bubble burst.

While the proposal is interesting, there are several issues that would need to be resolved before moving in such a direction. These issues include:

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  1. Good article David Llewellyn-Smith of Macro Business, unfortunately both Bouris and Joye are really exposing the current difficulties they may be experiencing and proposing a self serving policy shift so they both can repeat whatever they achieved pre GFC. There is no need for any inquiry into banking or to require private banks to devulge their cost of money details for their competitors to read. What a load of silliness.

    If we are still trying to encourage free enterprise in any business including banking, then we cant bring on the various political inquiries and policy changes suggested by Bouris and Joye for two main reasons not covered in the article.

    The RBA already has better control over the banks and other lenders post GFC than pre-GFC because we no longer have the variety of unbridled sub-prime lenders in the market place once mananged by Bouris, whilst not casting doubt about his lending morality in those days, but it still opened up plenty of opportunities to take on and collatererise the badder loans for passing onto unsuspecting victims.

    The second is we already have various credit unions and many other institutions who are involved in lending and will continue to do so on their own terms , which may still be not as Bouris and Joye would like it to be done. There organisations have their own prudential guidelines to follow, however if both Bouris and Joye where able to convince Superannuation funds to set up such funding groups then let them do so, but dont expect the Federal government to socialise the risk and in so doing dislodge the relativities between risk and cost between the various lending institutions..

    It is not the job of government to even out the successes of the big banks in favour of new local or overseas entrants by continually shifting the goal posts.. We are indeed lucky that our bigger banks can can continue to manipulate interest rates by in effect taxing the many home loan borrowers to pay for their commercial mistakes in business deals gone wrong and boosting their profitability to give continued confidence for depositors that their money is safe no matter if they complain of only getting 3% or less. I’d like to guess what would happen if one of our major banks decided to produce lower profits to help home borrowers and see how much of a run might undeed occur. I’m sure no bank will ever dare do that unless theere was no choice. I bet the Adelaide Bendigo are not going to tell anyone.

    by Gilly from St Arnaud on Feb 25, 2012 at 3:32 pm

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