In a blow to the smaller players in the banking industry, the RBA, in its second round submission to the Murray Inquiry, appeared to come down on the side of the entrenched status quo in the mortgage market, highlighting risks to stability from the potential result of “relatively more finance being directed towards housing”.
The RBA said that if David Murray recommended any changes to policy on competition grounds, he should consider, “whether the policy change might accelerate household borrowing, and the associated implications for systemic risk and the available funding for Australian businesses”.
It’s a good point and one that the Murray Inquiry will need to consider carefully if it is to recommend a way toward its goal of “competitive neutrality”. Without such an assessment, the RBA is worried that any changes would simply unleash a wave of cheap cash which would drive the price of established houses and units higher with no longer term net benefit to the economy or financial system.
In a further blow to smaller ADIs, the RBA said there was no need for support for the Residential Mortgage Backed Securities (RMBS) market which Murray had suggested – and some submissions advocated – might be a way for smaller institutions to access a cost of funds closer to that of the majors.
“Government support for the RMBS market can expose taxpayers to large contingent liabilities and foster imprudent risk-taking, as has been demonstrated overseas (see, for example, Calomiris (2011)). Moreover, conditions in the domestic RMBS market have improved over recent years (Aylmer 2013) and, as the Interim Report notes, there is little evidence of a market failure” the RBA said.
You can read the full RBA submission here
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