Finance

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

It's that time of year when Australia's bank executives go through their equivalent of a reality-TV audition.

Like an episode of the X Factor, the parliamentary hearings into the four major banks are conducted in an atmosphere of high theater. Chief executives attempt to carry off pitch-perfect performances while the parliamentarians sat in judgment try to launch a few well-placed rebukes that can get airplay on the evening news.

And like any reality TV show, the whole drama is oddly divorced from -- what's that word? -- reality.

Plenty of reasonable gripes have been leveled at the contestants in Canberra. Banking staff have been accused of mis-selling products to customers and unethical behavior in assessing insurance claims. Fees are too high, and unfairly levied.

Still, looked at in context it's not clear that Australia's lenders have an exceptional problem on this front.

Complaints to the country's Financial Services Ombudsman have bounced around between about 30,000 and 36,000 a year in recent times, but don't show the sort of rising trend you'd expect if standards were significantly deteriorating. Versus their global peers, Australia's banks get an unusually low share of their revenue from fees and non-lending activities, with two-thirds or more of total income coming from the traditional business of spreads between borrowing and lending costs.

That might suggest another line of attack -- that Australia's big four banks, protected by their semi-official "four pillars" status, are a cozy cartel exploiting their customers not by charging hidden fees and mis-selling products, but by jacking up margins on lending.

That argument doesn't quite work either: Net interest margins at the big four are pretty much in the middle of the pack globally, something that's particularly striking given the risk-free central bank rate in Australia, at 1.5 percent, is already higher than in most other developed countries.

Marginal Benefit
Trailing 12-month net interest margins at Australian banks don't look particularly wide
Source: Bloomberg

A better criticism might be around lending practices. The one X factor that makes Australia's banks stand out from the global crowd is the speed at which their loan books have grown. The stock of residential home loans was about 30 percent bigger in local-currency terms at the end of June 2016 than it was in December 2012, according to International Monetary Fund data. Banks in the U.S., the U.K. and Canada, meanwhile, increased their lending by 7.1 percent, 10 percent and 20 percent respectively.

That breakneck growth has been accompanied by an often lax approach to underwriting. Loans originated via third parties, such as mortgage brokers and those granted outside normal serviceability criteria, are among the most likely to result in default. And yet they've been on the rise, from 36 percent and 2.4 percent of new term loans respectively in the March quarter 2008, to 47 percent and 3.5 percent in the December quarter last year.

Quantity, Not Quality
Australian banks are still approving plenty of less reliable loans
Source: Australian Prudential Regulation Authority
Note: Categories are not mutually exclusive.

Interest-only loans, which strip borrowers of an equity buffer should prices fall, also make up a persistently large share of the total, at a fairly consistent 40 percent of new lending for almost a decade.

It's probable the real numbers are even worse. A UBS study last year found that 28 percent of surveyed mortgage applicants said they'd submitted information that wasn't wholly accurate. Mortgage fraud accounts for about 13 percent of all fraud cases identified in a 2016 study by data analytics business Veda.

This activity, with its echoes of the subprime lending frenzy that preceded the 2008 financial crisis, is probably what parliamentarians in Canberra should be worried most about. It gets surprisingly little attention, though -- perhaps because few politicians want to be the killjoys who take away the punch bowl from voters looking to join the real estate party.

Squeezing the Balloon
When regulators cracked down on investment-property loans, owner-occupier lending boomed
Source: Australian Prudential Regulation Authority

Regulators can afford to be more aggressive. The Australian Prudential Regulation Authority announced macro-prudential measures in 2014 to limit the growth in investment mortgages, which managed to reverse loan growth in that area for three quarters. The Australian Securities & Investments Commission last week started proceedings against Westpac Banking Corp., alleging it was making loans that borrowers might not be able to repay. 

Such activities will attract squeals of protest from banks, but that's a sign regulators are doing something right. Like the winner of any reality show, they're not here to make friends.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net