Whitepaper: Blueprint for Improved Diversity of Funding Flows into Australian Credit Markets

4 mins to read | 1 November 2023

Athena Home Loans was founded with a mission to change home loans for good. We have never been shy in that mission. Athena was launched as Australia’s first loyalty tax free lender. We were awarded the AFR BOSS Most Innovative Company 2021, for our platform to help Aussies pay down their home loan faster. Today we continue that mission, launching a whitepaper highlighting the opportunity to reform funding of Australian credit markets, to improve competition, fairness, resilience, efficiency and funding Australia’s long-term future.

Many Aussies don’t realise that our financial system is a global outlier, dominated by banks to an unusual degree. Banks originate ~95% of Australian housing credit, versus <50% in the USA & < 70% in the Netherlands. Australia’s massive pool of superannuation flows to credit markets via local banks (rather than directly invested into bonds, as is common in other global pension systems). Other global markets design, finance & regulate funding flows very differently, facilitating a more diverse set of funding pathways into credit markets. Key examples include the USA/Canada – where capital markets are the heart of funding flows – and the Netherlands – where direct investments in credit markets by pension funds & insurers complement the banking system.

This design choice matters:

• Competition: Australia’s banking system is among the most concentrated & profitable in the world. This is not an accident. Today, Aussie homeowners pay an estimated $35 billion per year in excess mortgage interest due to the failure to sustain the more diversified funding model in housing credit of the 1990s. Financial services are one of the most highly regulated sectors in the economy, with frameworks that skew capital & funding advantages to major banks. Implicit government subsidises chase away competition from other sources. Sustainable competition requires more than blocking bank mergers. We need stronger ongoing review of regulatory actions undermining competition in Australian credit markets.

• System fairness: Homeowners are in the ‘crumple zone’ of the Australian economy – unable to access competitive long-term fixed rate mortgages common in other markets. As a result, RBA rate hikes hit homeowners harder & faster than peer countries. The RBA’s recent 4% rate hike cycle cost households with a typical mortgage ~$20,000 per year in added interest (post-tax dollars). A housing finance system dependent on the massive transfer of interest rate risk from banks to borrowers is inherently unfair, when even central bankers are poorly positioned to predict the timing and scale of future rate moves. While Australia enjoyed decades of falling interest rates, it was easy to be complacent about the implications of these risks. Looking forward the cost will be starkly visible.

• System resilience: Today the savings of older Aussies in super are increasingly sent offshore – into “tech stocks in America & highways in Italy”. At the same time, funding Australian homes & businesses, at the margin, depends on offshore wholesale funding for credit markets. Every decade or so, a global crisis has required massive government support of the banking system. Most recently the RBA provided $188 billion of cheap money to the banks during COVID. Prior to that, the government guaranteed $170 billion in bank deposits & wholesale funding during the GFC. Central banks in other markets take a very different approaches to the RBA, encouraging funding flows into credit markets from institutional investors like pension funds & insurers to improve system resilience.

• Funding Australia’s future: Australia faces critical long-term challenges, such as funding the transition to a net-zero emissions economy, meeting the care needs for aging populations and building social & housing infrastructure. Bank capital frameworks constrain their ability to finance these long-term needs with short-term deposits. But super is already long-term. Members accumulate contributions over decades. Even a super member at age 65, with immediate retirement income needs, have a life expectancy of over 20 years. We need funding flows that utilise our massive pools of long-term money effectively.

Australia did not make a deliberate policy choice to be a global outlier. No financial system review concluded: “Let’s just dial banks to 11.” Rather our current model emerged as an unintended consequence of complex regulatory decisions and inadvertent subsidies during global stress events.

Calls for reform are not new. But the timing is powerful. Treasurer Chalmers has called for fresh thinking on the role of superannuation in building Australia’s future. The government has an active reform agenda to invest in social & housing infrastructure. We have fresh eyes from new leaders in regulators like APRA, ACCC, RBA and Productivity Commission.

The attached whitepaper proposes a blueprint for change – an action plan learning from the approach taken in peer markets like USA, Canada & the Netherlands. This requires coordinated action on the supply and demand side of funding flows. The centrepiece of this blueprint is the proposal that Australia launches a public securitisation program, modelled on Canadian best practice. This public program becomes a catalyst for greater maturity in the Australian bond market, increasing the fairness in housing finance, supporting the national housing strategy and more efficiently using Australia’s massive pool of long-term savings. In sum, the proposed evolution is a pathway to improved fairness, resilience, efficiency & competition in the Australian financial system.

Download the Whitepaper: Blueprint for Improved Diversity of Funding Flows into Australian Credit Markets here.