Today l post a pretty short Peachy piece about how the EZFKA banking actually works. For convenience I use some numbers from EZFKNZ, because they are nice and round.
Now, for the longest time, blokes who don’t understand banking – and certainly don’t understand EZFKA – have been freaking out about high risk lending and irresponsible lending in response to each upward spurt in property prices that is triggered by each “lower teh rates” episode (which they do dearly love). This is how the logic goes:
shit like this, too:
To describe how it actually works (ie outside the imaginarium), let’s use this headline as a case study:
Let us see what this means for lending:
|LVR||100% (aaah! Panic!)|
Later this year
|House price (+25%)||$1,000,000|
|LVR||80% (nice responsible number)|
This is how it actually works. No matter how much is lent today, or to whom it is lent, there is no real risk of default.
Rather than creating high risk loans, “lower teh rates” makes them disappear! Right across the back book! It’s almost the ultimate prudential stability tool. It makes banks safe as… bro!
Here are the takeaways:
- high risk lending isn’t about something being risky to the borrower
- high risk lending is about something being risky to the lender
- lending isn’t high risk if the collateral rises in value
- So, as a final flourish: to work out of lending is high risk, we don’t even need to know who the borrower is.
This is how it is. This is how it has always has been. Strangely, some have missed this dynamic. Perhaps it’s because the price rises have been so gentle and gradual (7% – 10%) as to obscure this process a little. Praise be to Jacinda Arden and RBNZ for creating a situation of 25% annual growth, where the dynamic becomes obvious, immediate and easy to illustrate.
(Praise be also to Jumping Jack Flash who has been writing with creative flair on this theme for a long time).