As if the current global monetary system didn’t put the middle-class at a structural disadvantage versus the wealthy, by taxing them disproportionately with inflation, encouraging dissaving and taxing labor (ordinary income) much higher than capital (long-term gains), we now find out that the middle class has a new reason they’re being pushed into poverty: banks are willingly trying to put them there.
In a report by the Sydney Morning Herald, the newspaper notes that more middle-class Australians are being pushed into poverty. The simple explanation why this is happening: Australian banks are trying to figure out exactly how much they can charge customers before pushing them into poverty; to do this they are using a formula which incorporates a poverty index to calculate the last marginal dollar of disposable income that the middle class has for fees and charges.
The banking and finance royal commission has cast light on a new type of poverty to emerge in our society: middle class poverty.
To understand it, we have to go back to an earlier government inquiry: the 1972 Commission of Inquiry into Poverty, conducted by Professor Ronald Henderson. That commission had no real policy impact, but its cultural impact was profound. It gave prominence to the Henderson Poverty Index: a measure of consumption described by Henderson as so austere that it was unchallengeable. Updated versions of this index remain a standard benchmark of poverty.
But more than 45 years on, the royal commission into finance is revealing that poverty is no longer just about low income. The commission has heard that Australian banks have adopted actual lending practices (as distinct from their official lending policies) that claim so much household income for contract payments that borrowers are left without enough money to fund basic consumption levels: they are living in poverty.
This isn’t an accident: it is a strategic policy by banks. How much do banks think households need for daily living? According to the Australian Prudential Regulation Authority’s submission to the royal commission, banks “typically use the Household Expenditure Measure [a relative poverty measure] or the Henderson Poverty Index in loan calculators to estimate a borrower’s living expenses”.
And regulators in Australia aren’t doing much to help – in fact, they’ve simply made a blanket “don’t worry about it” type statement while conducting a “targeted review”:
So measures designed to capture the impacts of low incomes are now targeting financially-enmeshed middle-income households, and not as a statement of social shame, but as strategic objects of bank policy.
This has caused embarrassment to APRA, the regulator charged with overseeing those bank practices. In response, it was permitted to make a supplementary submission to the royal commission in March.
APRA now distances itself from use of these lowly measures, claiming them to be an “under-estimation” of household expenses. It reports that in 2017 it conducted a targeted review of a sample of loan files, using external audit firms to ensure independent integrity.
Following the review, one “groundbreaking” conclusion emerged:
The review contended that lending on the basis of either poverty index is not consistent with sound risk management. It assures that its discussions with banks are leading to improvements.
But it doesn’t stop there, as regulators had already identified the problem more than 10 years ago and did nothing to act on it:
The urgency of this attention is disingenuous. In 2007, then APRA chairman John Laker revealed that a survey by APRA showed that “most [banks] use either the Henderson Poverty Index or (the higher) Household Expenditure Survey data from the Australian Bureau of Statistics as the basis for their living expense calculations … Our review indicated that many lenders were, at the time, using estimates of living expenses below the HPI or were not regularly updating their estimates”.
So a decade ago, APRA had already publicly named the problem, in the exact same terms as it names it now. It has simply watched as the practice of using a poverty index to measure a customer’s ability to repay a loan has become normalized as a culture.
A consequence of APRA neglect is that “poverty” now goes significantly up the income scale, well into what we generally call the middle class.
As the report further elaborates, the middle class is far more susceptible to slip into poverty as a result of their financial profiles versus either the upper or lower classes:
Middle income people are the cohort in greatest financial risk. They are highly leveraged: they spend more of their income on loan repayments than do people with higher incomes.
Second, their assets are un-diversified: they own labor market skills, some home equity and some superannuation.
Third, these assets are illiquid (not easily sold): you can’t transfer your skills to another, houses are costly to sell and superannuation is generally inaccessible. By contrast, people at the top of the income distribution also hold more debt, but their assets are more diversified and liquid, and many generate income streams. Conversely, low income people hold proportionately less debt and are more diversified than the middle: they don’t have their (more meager) assets tied up in housing.
Fourth, middle income people are under-insured or, in financial terms, unhedged. Their insurance isn’t keeping up with their borrowing. Low income people are relatively well insured. They face compulsory insurance, such as for cars and health. High income people have also not increased their insurance, but their need is less because they are more diversified and have more discretionary funds.
In a commercial setting, financial units that are highly leveraged, un-diversified, illiquid and un-hedged are considered to be high risk.
So who is advocating for the interests of this cohort? Not the regulators. Their mandate is to ensure that households don’t default at unexpected rates and create problems for financial institution solvency (APRA’s concern) or for wider financial stability (The RBA’s concern). The fact that people are living on the Henderson poverty line is not a concern in itself to the regulators; it only matters if they stop paying their bills.
The article’s author, an emeritus professor of political economy at the University of Sydney, concludes that the regulatory system is
rigged set up in such a way so that banks can continue to rip off the middle class, as opposed to making sure that the consumer is actually protected:
So Australia’s regulatory framework is vigilant in ensuring that households don’t create stability problems for the financial system, but no regulator has a mandate to ensure that the financial system doesn’t create stability problems for households. Someone or something has to assume this mantle, for mounting poverty and default risk is surely going to play out as a social crisis, not just a financial one.
This leaves the obvious question: if taxpayers are blanketed with regulation that benefits banks at the expense of the middle class, just why did taxpayers (i.e. the middle class) bail out the world’s banks ten years ago?