Debelle cracks it over 'crunch'

Overblown discussion of a "credit crunch" is misplaced and overlooks that "reductions in both the demand and supply of credit have been at play, and it is hard to separate their effects," Guy Debelle, deputy governor of the Reserve Bank of Australia, told a FINSIA seminar in Melbourne yesterday.

In a spirited analysis of APRA's "various measures put in place to address the risks around housing lending," Debelle slammed the tendency to conflate "the riskiness of the borrowing as being the source of the negative shock".

"My concern is for its potential to be an accelerator to a negative shock from another source," he said.

"To put it another way, I don't regard it as likely that household borrowing will collapse under its own weight.

"Rather, if a negative shock were to hit the Australian economy, particularly one that caused a sizeable rise in unemployment, then the risk on the household balance sheet would magnify the adverse effect of that shock. This would have first order consequences for the economy and hence also for monetary policy."

Framing his conclusions around themes of "resilience" Debelle said "the available evidence suggests that the policies have meaningfully reduced vulnerabilities associated with riskier household lending," and so dampened prospects of future economic shocks.

In a preview of the deeper analysis of the overlapping forces informing credit supply from the RBA, Debelle argued "the regulatory measures have significantly reduced the riskiness of new housing lending.

"A smaller share of new loans are to investors, are interest-only, have high LVRs or are to borrowers more likely to have difficulty repaying the loan. But it takes time for the riskiness of the stock of outstanding loans to improve.

"When you implement a change in lending standards the existing loans are no different to how they were the day before. But over time a larger share of outstanding loans will have been written with more stringent lending standards, while the larger share of principal and interest loans will see more of the outstanding loans have a declining balance over time.

"Finally, in assessing the overall riskiness of the debt both before and after the various measures, it is worth remembering that arrears rates remain low."?