Transcript of Question & Answer Session Some Effects of the New Liquidity Regime

[inaudible] from University of Technology Sydney. So my first question is did Australian banks maintain 100% LCR 2015 and another question did the banks report LCR daily or monthly?

On average it's 120 and some banks hold more than that. They report them to APRA every day, they do their reporting in their quarterly profit updates you can find that it's – they've been doing that I think for at least a year now, so it's reported publicly on a quarterly frequency in their regular profit updates but its provided to APRA every day.

Thanks.

Over here.

About a year ago we had a report, Tulip's report indicating that the house prices in Australia are 30% undervalued.

Under or over?

Sorry overvalued.

Okay.

And then we have a Nobel Prize Winner [inaudible] Schmidt invited to Macquarie University indicating that Australian property market is entering a bubble. And now we have also today there was the ABS data and the rent indices and clearly indicating that house price to rent ratio, in fact the rents are following house prices are slowing and the other observation before I ask my question was that we can realise during the last couple of months we see that the share of the owners occupiers loans is continuing to rise whereas the investment loans has showing some sign of you know easing and falling to some extent. Now what is your opinion on the recent increasing the liquidity has pushed the interest rates, the standard variable mortgage rates high and to what extent we can relate the rise in owner occupiers to this interest rate differentials? In other words my question is, is rise in owner occupiers loans real owner occupiers or is it investor loans appearing in a form of owner occupiers just simply because they want to pay lower interest rate? Thank you.

So some of it's that. If you're paying, you know investors have to at the moment pay about 25 basis points more than an owner occupier, so yes some investors have now decided that they are living in the place that they previously recorded as an investment, and have decided that they're an owner occupier rather than an investor, that's not the full story but there has indeed been some switching. So the person hasn't switched they've just decided to call themselves an owner occupier now rather than an investor. One of the other things which has gone on is that some of the banks have switched them unilaterally by looking at the address on the property and lining that up against where they send the mortgage bill too, and if the two are things are the same thing they say well you're probably an owner occupier not an investor, which is very generous of them, because it means they get 25 basis points less of interest. But so yes there is some of that switching going on. In terms of the flow as best as we can tell, investor lending is actually slowing above and beyond just people switching categories. But it's still there, it's just not growing as fast as it was earlier in the year.

Adam right down the back.

Oh thanks Guy, Adam Creighton from The Australian. Just two quick questions, firstly is there any sense in which the deterioration of the Commonwealth Government actually makes it easier for banks to satisfy these liquidity requirements? And then secondly if the Federal Reserve raises rates overnight what sort of impacts do you expect in Australian financial markets?

Stuff will happen. I've answered this question about five times in the past five months and stuff will probably happen. s I think Glenn said again this morning and I've said before, this is the most telegraphed rate rise in the history of rate rises and no one can say that they haven't been warned that this is coming, but nevertheless I'm sure stuff will probably happen. What stuff, don't know, we'll see tomorrow.

On your first question though yes if there's a bit more government debt, it's not an absolute number, it's a share of the stock outstanding in terms of what we assess the banks can actually hold without impairing the liquidity in the market. So if there's more debt on issue then there's more than the banking system can hold more of that, same share just a higher absolute number. That said, some of the state government budget numbers are, not all, but some, are coming out the other way. And in the general scheme of things an extra 10 or 15 billion worth of debt that's not a big number and doesn't make relative to the sort of required holdings they have about 400 billion, so it adds a few billion but it's not a sort of first order change.

Got time for one more, if anyone wants to go down that route.

If I can ask you a question?

Yeah Fari.

We just wanted to hear in terms of comparison with what we've done with LCR to other countries, are there any lessons learned? Are there any comparative studies to see how similar economies have implemented LCRs? And the second issue here is when we provide facilities to banks as Reserve Bank Australia is there an implication for the Reserve Bank's own liquidity over time or is not much correlation?

You mean for our?

Yes.

NoneI think – I mean on the first question. I don't think everyone has actually fully implemented them, some of them have been phased in a bit. I mean it's fully there in the US and I'm pretty sure in the UK and a number of other countries too, but in Europe I think it's still on a bit of a phasing process. But also the situation here is different from it, in the US at the moment it's not hard for the banks to meet their LCR requirements because the Fed's balance sheet is so large, that it's actually it's pretty easy and that's similar in Europe and Japan as well. So if the central bank's balance sheet is that large and the bank's relative to the size of the economy and the size of the banking system then the banks are holding deposits with the central bank which are by definition high quality liquid assets, so it's just much easier for them to actually get there. So the sort of macro circumstances in a number of these countries actually affect the degree to which it makes it easy or not for the banks to comply. But this has only been in for a year or so and so it's probably a little too early to get into cross country comparisons but there are some fundamental differences as much in the macroeconomic situation on a number of other countries which affect the degree to which this is actually having an impact.

Right I'll call it quits there.

Is there any other question, I can't see one.

I can't either actually as I'm blinded by light.

Anyone else?

I'm happy to leave it there.

Okay thank you very much, please join me in saying a big thank you to Guy.