This Is NOT How To Finance Affordable Housing

Coming late to this particular party, but better late than never (excerpt):

Putrajaya allows developers to give housing loans

PETALING JAYA, Sept 8 — The Urban Wellbeing, Housing and Local Government Ministry today announced the introduction of an initiative that enables property developers to give out loans to buyers at an interest rate of between 12 and 18 per cent.

Minister Tan Sri Noh Omar said that the move is intended to assist Malaysians who are unable to get a full housing loan from banks or those who may only be given a partial housing loan….

The Fallacy of Composition and the Monetary System

I was tempted to be snarky about this, but that wouldn’t be fair, on laymen or anybody else.

It’s not easy thinking through economic problems, and monetary problems in particular. Slip ups are common, even among seasoned economists. It doesn’t help that standard texts on money and banking are badly wrong on how banks actually operate and how money is created. It’s no wonder then that people have a hard time figuring out what’s going on, and how changes in policy and customer preferences affect the monetary system.

Example 1 comes from a couple of weeks ago (excerpt):

The Financial Services Act

BAFIA is no more; long live the FSA (excerpt):

Financial Services Act 2013 and Islamic Financial Services Act 2013 Come Into Force

The regulatory and supervisory framework of Malaysia enters a new stage of its development as the Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA) come into force on 30 June 2013.

The FSA and IFSA is the culmination of efforts to modernise the laws that govern the conduct and supervision of financial institutions in Malaysia to ensure that these laws continue to be relevant and effective to maintain financial stability, support inclusive growth in the financial system and the economy, as well as to provide adequate protection for consumers. The laws also provide Bank Negara Malaysia with the necessary regulatory and supervisory oversight powers to fulfil its broad mandate within a more complex and interconnected environment, given the regional and international nature of financial developments. This includes an increased focus on preemptive measures to address issues of concern within financial institutions that may affect the interests of depositors and policyholders, and the effective and efficient functioning of financial intermediation.

It is important that Malaysia's regulatory and supervisory system is adequately equipped to respond effectively to new and emerging risks so that confidence in the financial system is preserved and that the critical financial intermediation activities which are vital to the economy are not disrupted. The FSA and IFSA amalgamate several separate laws to govern the financial sector under a single legislative framework for the conventional and Islamic financial sectors respectively, namely, the Banking and Financial Institutions Act 1989 (BAFIA), Islamic Banking Act 1983, Insurance Act 1996 (IA), Takaful Act 1984, Payment Systems Act 2003 and Exchange Control Act 1953 which are repealed on the same date…

Shadow banking has become an increasing concern among regulators the world over in the aftermath of the Great Recession. The FSA and IFSA is BNM’s response, allowing it broader powers and a wider scope for those powers, encompassing “financial holding companies and non-regulated entities to take account of systemic risks that can emerge from the interaction between regulated and unregulated institutions, activities and markets.”

This suggests that entities previously outside banking regulation such as co-ops, development institutions, and companies with significant shareholdings in banks may come under BNM’s withering and critical eye.

I can’t wait to see what happens.

Modern Money Creation

A fascinating article on VoxEU yesterday about what I’d consider to be shadow banking, and its a fairly clear exposition (excerpt):

The (other) deleveraging: What economists need to know about the modern money creation process
Manmohan Singh & Peter Stella

The world of credit creation has shifted over recent years. This column argues this shift is more profound than is commonly understood. It describes the private credit creation process, explains how the ‘money multiplier’ depends upon inter-bank trust, and discusses the implications for monetary policy.

BNM Annual Report 2011

Yesterday saw the release of Bank Negara’s annual report for 2011. The big news of course is the lower official forecast for the year, with GDP growth for 2012 downgraded from 5.0%-6.0% to 4.0%-5.0%. Given all that’s happened the past few months, and the initial data that we’ve seen in January, it’s come as no surprise to anybody. External demand is expected to be weak (again, no surprise), while investment is expected to pick up some of the slack, particularly public investment.

All in all though, I do think we might see growth this year on the upper side of that forecast bracket.

Reserves, Deposits and Loans

Some days I feel like tearing my hair out. It seems like so many people are living in a past that just doesn’t exist anymore. It’s one thing for a layman not to grasp the intricacies of macro-economics – but its quite another for analysts and economists to make basic mistakes. And even worse if its a policy maker.

I fully understand how Hafiz Noor Shams feels.

Putting A Price Tag On Moral Hazard

I’m conscious of the fact that there are many more readers of this blog than there used to be, and not many have a background in economics.

So to introduce this subject, here’s Wikipedia’s definition of moral hazard:

Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions.

December 2011 Monetary Conditions

Now that we know interest rates aren’t going to be cut, at least until March, what did the latest data tell BNM?

The money supply situation doesn’t look too gloomy (log annual and monthly changes; seasonally adjusted):

In fact, it looks positively healthy to me – maybe even too healthy. Both M1 and M2 are growing at near 14% on an annual log basis, and monthly growth is pretty positive as well. Breaking it down, there were decent increases in pretty much all major categories except in forex deposits, which isn’t too surprising given the turmoil in global markets during the holiday period.

BNM Clampdown

I've just had an accident with my laptop - involving a full mug of tea - so I might be offline for a while until I can resolve the problem.
In the meantime, along with the GDP report last week, BNM made two announcements. The first one deals with regional financial integration (excerpt):

Broadening Regional Financial Collaboration

Bank Negara Malaysia will be expanding the list of eligible collateral following greater regional financial integration. This is aimed at enhancing the liquidity management framework. This is in line with the growing significance of regionally active financial institutions which have intensified the financial inter-linkages between economies, particularly in trade, investment and financial services.

In essence, what it means is that BNM is laying the groundwork for financial settlement of cross-border transactions in anything other than US dollars, to go along with the existing swap line arrangements between the region's central banks. Since this means that intraregional trade need not be denominated in US dollars (which requires US dollar liquidity domestically), it also lessens the necessity for keeping excessive US dollar reserves. Malaysia's direct trade with the US is just 10% of total trade, whereas regional trade ex-Japan is at nearly 60%. Recall that the recession of 2008-2009 in Malaysia wasn't really a factor of a drop in real external demand, but a serious drop in US dollar liquidity from flight to safety and a sharp drop in trust within correspondant banking networks.

The Future of Banking

VoxEU has a new compilation of the latest European thinking on  reforming finance. While a lot of it is in EconoEnglish, I think many will find some sympathy with the ideas and issues being addressed. For example, since in a crisis the importance of finance to the economy means that banks will be bailed out or at least debt will be worked out, there is a socialisation of losses but gains will be private in more normal times. In other words, there is a negative externality involved in banking, which is not fully reflected in its pricing, the pursuit of gain or risk taking, or in its distribution of profits.

These and more issues are discussed, so if you’re willing to wade through some of the jargon, the e-book is still a worthwhile read.

Technical Notes:

Beck, Thorsten ed., “The Future of Banking”, Centre for Economic Policy Research, October 2011

MBSB: Salary Deduction Is Low Risk

You’ve got to be kidding me:

MBSB adopts best industry practices: CEO

PETALING JAYA: Malaysia Building Society Bhd (MBSB) adopts the best industry practices when evaluating the creditworthy of a government servant and does not “simply disburse personal loans based solely on salary deductions,” according to chief executive officer Datuk Ahmad Zaini Othman…

…In a statement he said: “MBSB made an impact in the industry in mid-2009 when it re-entered the market and provided Personal Financing-i to government servants at the lowest rate of 4.90% per annum.

“This was markedly lower than most rates then which were above 7.50%. It was also significantly lower than another source of financing which is credit card at between 13.5% and 17.5% per annum or its cash advance withdrawals at the maximum of 18%.”

“MBSB believes that the rate offered is the true reflection of the level of risks undertaken by MBSB as repayment is collected via salary deduction.”

Maybank Chief Says: Personal Loans A Concern

Responsible corporate citizen or conniving oligopolist? I’ll plop for the former for now, despite the inherent conflict of interest in the CEO of the country’s largest bank pleading “over-competition” in the domestic banking sector. Why? Because I think he’s right as far as non-bank lending is concerned, and because if the remark came from outside the banking community it would have been accepted without reservation (excerpt):

‘Rein in super-easy personal loans’

KUALA LUMPUR: Maybank wants the authorities to tighten control on the ease with which personal loans are being given out to consumers.

CEO Datuk Seri Abdul Wahid Omar cited personal loans given out either by non-bank entities or “over-competitive” banks, as worrying.

“We need stronger enforcement from the authorities on the personal loans issue as it is becoming a cause for concern,” he said after the group's annual general meeting.

Wahid suggested that non-bank lenders were quite lax when giving out personal loans, saying that these institutions should look at adopting some of the same standards as banks, especially when underwriting the loans.

Household Debt: A Worry – Maybe

From last Saturday’s Star (excerpt):

Rising household debt

…Over the last one to two years, the increase in Malaysia's household debt has been largely fuelled by the availability of cheap mortgage rates arising from the cut-throat competition in the housing loan market.

Cheap money has enticed people to borrow and the rate of which households are taking on debt to buy houses, cars or finance renovations or holidays has indeed grown.

Since the 2008 global financial crisis, Malaysia's household debt service ratio, which measures the ratio of debt payments to disposable personal income, has jumped about 10 percentage points to 49% in 2009 before easing slightly to 47.8% last year…

Household Debt: A Different Perspective

From today’s The Star (excerpt):

Malaysia's household debt on the rise...But mortgage NPLs at an all-time low

PETALING JAYA: Malaysia's household debt rose at a rapid rate of 11.1% per annum from 2004 to 2009, and from RM516.6bil at end-2009, it climbed by 8.4% to RM560.1bil as at end-August 2010, said CIMB Research.

The household debt to gross domestic product (GDP) ratio increased from 66.7% in 2004 to 76% in 2009 but is estimated to ease to 74.6% at end-2010.

The rapid growth of household borrowings is causing some worries that the excessive leveraging by households may make the economy and financial sector more vulnerable to instability and crisis...

Risk, Return And The Perfidious Banker

Just a quick post to a question posed by Wenger J Khairy in my post on SRR:

Why is the bank sitting pretty on a pile of cash?

I think the answer has to be the huge almost titanic differential between cost of funds (deposit rate) vs. the BLR. I think the spread is like 400 bps, something which makes it very easy to be a banker and very crappy to be a consumer. So banks don't have to stretch to be profitable, just lend to the consumers and earn the differential

This is a fair concern, especially in light of the charges levelled at the Federal Reserve during this past crisis – by keeping interest rates at near 0% and inviting banks to borrow against all sorts of collateral, coupled with record issuance of US Treasury Bills, meant that US banks had an almost risk free way to gain profits. 30 year Treasuries were yielding over 3% in 2009, and over 4.7% currently. Nice business if you can get it.

BNM Announces 70% LTV For 3rd Mortgages

I’ve been travelling this morning, so posts will be running late today.

As rumoured last week, BNM has announced curbs on property lending, but only for people carrying more than two mortgages:

Measures in Promoting a Stable and Sustainable Property Market and Sound Financial and Debt Management of Households

Bank Negara Malaysia wishes to announce with immediate effect the implementation of a maximum loan-to-value (LTV) ratio of 70%, which will be applicable to the third house financing facility taken out by a borrower. Financing facilities for purchase of the first and second homes are not affected and borrowers will continue to be able to obtain financing for these purchases at the present prevailing LTV level applied by individual banks based on their internal credit policies…

Curbing Household Debt

BNM will apparently be making an announcement next week on limits to housing loans:

Bank Negara likely to announce property curbs next week

KUALA LUMPUR: Bank Negara is expected to announce next week measures to curb property speculation and a programme to create financial awareness for the youth, said sources.

The introduction of a loan to value requirement for people buying their third house or more has been talked about, but central bank governor Tan Sri Dr Zeti Akhtar Aziz said any new rules regarding property loans would not be a blanket clamp. ..

PEMANDU Acting Fast And Loose With The Numbers…Again

Once is an accident, two a coincidence, three times…well.

I first remember seeing this particular stat at the ETP Open Day, but didn’t think much of it at the time…maybe I should have looked closer. But this article shows that others are picking up on the “fact” that loan growth has moderated in the last five years compared to the early part of the decade (excerpts; emphasis added):

ETP to help revitalise financing sector

High loans growth seen in construction, real estate and transport sectors

PETALING JAYA: Loans growth from banks’ domestic operations which had shown signs of moderation over the past five years is expected to be boosted by increased activities under the Economic Transformation Programme (ETP).

Based on statistics released under the ETP, loans growth from banks’ domestic operations had moderated to a compounded annual growth rate of 10% in the five-year period of 2005 to 2009 versus 13% between 2001 and 2005…

Sometimes Government Policy Does Work Part II: Not All Bailouts Are Equal

During the depths of the global financial crisis, there was a lot of anxiety over the “bailout” of the US banking system (later extended to other corporates such as GM) via the Troubled Asset Relief Program (TARP), which on its own amounted to nearly USD700 billion (about half of which was expected to be lost). Consisting of injections of capital and purchases of illiquid, risky assets, TARP provided a backstop to the banking system’s liquidity risks when the interbank market collapsed in late 2008.

While TARP can be criticised for reinforcing moral hazard problems in the banking sector, it looks like the US Treasury might get off with at worse a small loss (excerpt):

TARP Didn't Bust the Bank
The much-maligned bailout program made money on most Wall Street investments and cost less than expected

Bailed-out banks, insurers, and automakers are a sore spot for millions of Americans hit hard by the financial crisis. Candidates running in November, especially those waving the Tea Party banner, are using "no more bailouts" as their mantra to attract voters. Yet there's a disconnect between the political rhetoric and the facts on the ground.

This Isn’t And Never Has Been A Sub Prime Crisis

Back in 2008, when the Great Recession was just beginning, I told my staff not to label the financial problems facing the US and Europe as a “sub-prime” crisis. The default levels in the sub-prime mortgage market in the US weren’t actually much higher than they were in the previous US recession of 2000-2001. The big difference between then and now was the degree of securitisation – the problems arose because of structured derivatives built on sub-prime mortgage loans that were mispriced relative to their risk factors, not the sub-prime mortgage loans themselves. Calling it a “sub-prime” crisis risked causing people to misunderstand what the crisis was about, and what had to be done about it.

But two years on, the financial problems have spread far beyond asset-based securities as Scott Sumner discusses:

Which state had the most bank failures during 2008-10?

No, it’s not centers of sub-prime madness like Arizona or Nevada. Nor is it big states like California or Florida. It’s Georgia. And Illinois is second. Check out the graph in this link:

There is a good reason why most bank failures in 2009 did not occur in the sub-prime states; sub-prime loans were not the main problem. Indeed mortgages of all types were not the main problem. What was? According to McNewspaper USA Today it was construction loans, often for commercial real estate: