Frydenberg to prioritize credit as government prepares Hayne response

Treasurer Josh Frydenberg has said he will be looking to prioritize credit lines to keep the Australian economy flowing, as the Royal Commission prepares to release its long-awaited Hayne report into the financial misconduct revealed to be widespread across the banking sector.

The government is expected to take the weekend to draw up what they believe is an appropriate response to the report, as they look to balance the wishes of the public to see strong action being taken, and also ensure the banks still have enough available capital to keep a liquid market going.

Frydenberg said the initial focus would be on making sure consumers benefit from any changes to the system, and felt that the need to adequately protect them from some of the issues which have taken place in the last few years was key. From there they would also need to think about how to make sure the economy did not suffer. If the banks were squeezed too hard, too soon, there are growing fears that it could lead to a market shock and a downturn in lending.

Such a move has already been described as an unlikely course of action to take as it would leave the governing party’s fiscal credibility in tatters, and Frydenberg is clearly looking to show he is aware of these complex issues as they ready their response.

Credit has already been tightening as many lenders look to safeguard their profits ahead of the changes they expect to be mandated by the commission report. Part of the issue in the first place was that plenty of unsuitable loans were handed out, especially amid a culture of rewarding the sale of the loan, rather than looking after the customer.

This has led to a fair amount of distrust in the sector, and it seems certain that the banks have some way to go to regain some elements of faith from the public. Given that they have already clawed back some of their lending policies in order to protect profit margins, it is hard to know just how easily they will be able to do so.

Frydenberg told Australian media that ‘the government’s principal focus is on restoring trust and confidence in our financial system’, which may be no easy feat to achieve ahead of elections later this year. Both sides of the political sphere are likely to use these developments to draw in voters, so how the government handles this will be seen as a key indicator of how the election could play out.

The treasurer also noted they would ‘consider the broader implications for the provision of credit’ and discussed the need for ‘affordable and accessible access to finance for households and businesses’, as he spoke of how ‘the free flow of credit is critical to the health of the economy.’

Lending laws are expected to be legislated more tightly, meaning banks will have to carry out more checks when they are handing out loans to businesses and households, but this could easily have the mooted impact of a credit squeeze if not mitigated effectively.

Prime Minister Scott Morrison earlier warned that the ‘consequences would be quite significant’ if credit is allowed to tighten to the point that the flow of the economy would grind to a halt. With the housing market already on a downturn, the government has a lot of work ahead to keep everything running smoothly.