11
Feb
10

Regulation and corporatism

Eric Crampton offers a Socratic lesson on Kiwi taxi companies’ lobbying efforts to require shields between driver and passenger compartments:

(Spoiler warning: requiring cabs to be fitted with permanent shields makes it harder for part-time independent operators to, well, operate.)

This throws some new light on a Globe and Mail story I came across earlier today:

The proposed regulations sound eminently sensible:

The key proposal under discussion would see the creation of new conditions the banks would have to follow when determining whether a customer can afford a mortgage, according to sources. Those rules would require banks to consider whether a person who takes out a variable-rate mortgage on a home can continue to make the payments if interest rates were to go up significantly.

Seems like a reasonable way to curtail the terrifying spectre of predatory lending, doesn’t it?  Or, put another way, it seems like a reasonable way for banks to protect themselves from potential risk in a shaky post-credit-crisis world.  It’s sort of like installing a plexiglass shield in your cab to ensure that the guy in the back seat can’t reach forward with a steak knife and demand your wallet.

Later on in the article, we discover that this is part of a concerted push by large banks to “respond to” Canada’s “unusually robust” housing market:

Finance Minister Jim Flaherty is under pressure from a number of experts, including executives of major Canadian banks, to take action in the face of surprising strength in the country’s housing market, which shows no signs of letting up. The fear is that many of the borrowers who are buying homes because of unusually low mortgage rates will struggle with their monthly payments when interest rates rise. That could have a dampening effect on the broader economy by prompting consumers to cut back their spending as they direct all their money toward their mortgages.

(Emphasis added.)

So if the “major Canadian banks” can find enough common cause to lobby Parliament for new regulations, why not simply restrict their own lending practices without waiting for the ponderous bulk of government to address the issue?  The Globe suggests (lack of) uniformity:

While some banks are already doing this behind the scenes, there is no standardization. Each bank has its own underwriting criteria and some are tougher than others. For instance, some banks ensure that their customers can afford their monthly mortgage payments if they were 100 basis points or 200 basis points higher.

Hmm.  If I was running a bank — or maybe a small local credit union — that sounds like a point on which I’d be able to compete with the big guys.  Maybe I could use local knowledge more effectively to identify real credit risks, and sell some people mortgages who otherwise would be denied them.  Or maybe I’d think that’s what I was doing, accumulate a lot of bad credit risk, and go under in five years.  However:

What Ottawa is considering doing is imposing standard minimum rules that banks would use to determine whether customers can service their mortgage debt. It’s not clear how stringent the rules would be, or whether they would only apply to variable-rate mortgages.

While “standard minimum rules” sounds awfully impartial and even-handed, it seems to me that these rules would benefit banks whose internal underwriting criteria are as strict as or stricter than the federal minimum standards, and remove some (possible) comparative advantage from the others.  I’d be willing to bet that the big banks lobbying for these standards are in the former category, but I don’t actually have any data either way.

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5 Responses to “Regulation and corporatism”


  1. February 12, 2010 at 20:14

    Sounds like risk-based pricing, something smart lenders have been doing for years.

  2. February 14, 2010 at 19:01

    So of course, “risky” = politically incorrect.

    • February 14, 2010 at 20:58

      “risky” = politically incorrect

      Well… sort of. What do you want to bet that when (smaller?) banks start implementing these restrictions and turning down mortgages to low-income buyers, we’ll hear a piercing wail from legions of Caring People about evil fat-cat bankers discriminating against the economically disadvantaged? And then, of course, we’ll get Yet Another Fucking Law.


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