How do we Hibernate the Economy when we must: getting banks to provide needed insurance to the business sector
By Rohan Pitchford and Rabee Tourky
This is a follow up post to our earlier disagreement with proposals made by colleagues introducing a new role for government in the hibernation of the economy while the health sector deals with the pandemic. Their proposal was for large scale government intervention providing insurance for the business sector through revenue contingent loans inspired by the way Australia funds higher education (HECS income contingent student loans). We believe that the proposed scheme is dangerous for the future of the economy.
Here, we highlight the role of banks in providing insurance for businesses during what we term the economic hibernation period induced by the public health response to the virus. There are, as always, problems with private sector solutions — in this case, coordination problems caused by the temptation of a bank to defect from policy solutions aimed at preserving current going-concern value of firms. (We will discuss the economics of our proposal in a pending post). As previously stated, our suggestion is that the government facilitates the transmission of low rates by doing whatever it can to encourage renegotiation of loans, credit lines and debt forgiveness by private banks.
The focus of this post is on the institutional framework of regulation of Australia’s banking sector, and impediments to a coordinated approach to providing needed private sector insurance to business during hibernation.
Institutional framework in Australia: getting banks to provide needed insurance to the business sector
The Reserve Bank of Australia (RBA) and Australian government agencies with responsibilities over financial regulation, do not have directive powers over debt forgiveness and renegotiation. They are unable to compel banks to forgive mortgages for example.
The RBA has no formal powers over debt to banks, but can and does, increasingly, use speeches as a way of encouraging/discouraging certain behaviour by both consumers and firms. The RBA and government agencies, however, have the ability to forgive debts of banks, to provide finance for private banks, and to even underwrite commercial bonds issued by banks (as they did during the GFC when they allowed banks to sell USD denominated commercial bonds in the US that are underwritten by the Australian government). This ability to provide ad hoc insurance to the commercial and retail banking sectors during a crisis, provides the government with effective strategic powers vis-a-vis the banks. While Banks are able to ignore government over specific debts, they are not able to entirely ignore coordination mechanisms setup by the RBA and Australian government agencies with responsibilities over financial regulation.
Proposal I. That an Emergency National Banking Council be setup, headed by the RBA aimed at coordinating bank policies during the period of economic hibernation. This is different to the present Council of Financial Regulators. Banks have a seat on the table in the Emergency National Banking Council.
ASIC regulates banks and other lenders and is responsible for consumer protection, in coordination with ACCC, when banks misbehave. ASIC’s consumer-protection powers do not come into effect unless consumer law has been contravened: In the case of debt collection this is triggered by coercion, harassment, misleading or deceptive conduct, etc. However, the relief here does not extend to debt forgiveness or mandatory renegotiation. Therefore the power of ASIC to address these problems currently appears quite limited.
Proposal II. That temporary emergency powers be granted to ASIC, adding an emergency-public-interest component to their enforcement powers. An example of egregious behaviour during hibernation that is seemingly otherwise permitted by law — but very clearly not in the emergency-public-interest — is repossession of homes due to unavoidable delinquency in mortgage payments.
APRA is charged with the prudential regulation of banks and lenders who are authorised deposit-taking institutions. Inter-alia this helps protect deposits. We suggest that this is more of a post-hibernation role, since deposit insurance can be strengthened as needed. If APRA is directed to ease some requirements on lenders, such as capital holdings, then this should encourage some debt forgiveness.
Generally, coordination between banks would contravene the anti-competitive provisions of the Competition and Consumer Act. However, coordination may be authorised by the ACCC when it is satisfied that the public benefit outweighs public detriment, as it was for the Australian Banking Association’s small business relief package.
Proposal III. The ACCC authorise appropriate coordination within our proposed Emergency National Banking Council.
Rabee Tourky is the Director of the Research School of Economics at the Australian National University and The Trevor Swan Distinguished Professor of Economics. His interest has been the operations of markets and market incompleteness.
Rohan Pitchford, is a Professor of Economics in the Research School of Economics, he works on financial stability and securitisation. He has published papers on default, securitistion, and contracts in the leading journals in Economics. He is a graduate from MIT.