Last Updated: 22 November 2023
If the credit crunch was caused by lax lending standards and wishful thinking about asset prices, nobody seems to have told Dutch bank ING.
ING’s decision to offer perpetual (non-maturing), interest-only mortgage loans at the top of what must surely be the greatest developed market property bubble of all – Australia’s – defies belief. Given the probability of large-scale defaults if the bubble deflates, ING’s new loan scheme seems the equivalent of playing Russian roulette with five bullets in the revolver chamber.
Making indefinite enslavement by debt sound like an attractive lifestyle choice, ING Direct’s CEO, Don Koch, argues that “[interest-only] loans have been popular for years in the UK and Europe, where repaying capital is seen by many as unnecessary and prohibitively expensive. [They have] worked fantastically in Europe as a way for people to get home ownership and build wealth throughout their lives. It just requires a change in mindset about how you live with debt.”
Perhaps ING’s strategy is not so foolish, however. It’s a perfect example of the moral hazard problem described by Bank of England economists Piergiorgio Alessandri and Andrew Haldane in a November 2009 paper, “Banking on the State”.
Banks are gaming us all, say Alessandri and Haldane. While governments say “never again” to the prospect of intervening to save financial institutions from the costs of their bad business decisions, bankers – conditioned by the experience of 25 years of government bailouts – don’t believe them. They therefore double their bets. “This adds to the cost of future crises. And the larger these costs, the lower the credibility of ‘never again’ announcements. This is a doom loop,” write the two authors.
However, while individual bankers feel that the odds are weighted in their favour when behaving recklessly, it’s a trickier question when it comes to bank share and debt holders. True, governments have come to their rescue so many times in the past, but can they afford to do so again?
ETFs tracking the Stoxx 600 banks sector are showing signs of “rolling over”, having repeatedly failed to make further upward progress after the explosive rally of the second and third quarters last year.
And here’s a chart of db x-trackers’ iTraxx Europe subordinated financials ETF (rebased to 100 on 31 December 2008), exhibiting very similar behaviour over the last couple of months.
With public finances under pressure in almost every major economy, are banks like ING taking one gamble too far?