The New Monetary Order poses challenges and opportunities to financial institutions in Australia. Here's what banks and insurers alike can expect from the higher-for-longer interest rates.

Watch more from the New Monetary Order Video Series and discover how financial institutions are adapting to the evolving monetary landscape.

Catherine Downes

Hi, I'm Catherine Downes and I'm an associate in the Sydney team. I'm joined today by Ed Emanuel, the Australian market lead to talk about the New Monetary Order.

Ed Emanuel

Hey Catherine, good to be here. Thanks for having me.

Catherine

Great. Ed, the main theme of the paper is the New Monetary Order, which is characterized by higher-for-longer interest rates. What sort of challenges do you think this poses for the financial services sector in Australia?

Ed

Thanks, Catherine. This is a series of papers that we have completed around the world because Australia is not alone in having to adjust and adapt to higher interest rates from having low interest rates for quite some time. It's really going to require an adjustment to a lot of the balance sheet settings that a lot of the financial institutions have.

In Australia, one of the key prominent portfolios or areas that are under the most pressure or shift is that of the mortgage portfolio. Low interest rates environment has created housing affordability to be there, and housing growth has been significantly higher than it is now. We've already seen quite a change in the housing portfolios and as a result of that, the banks in particular have been slowing their lending and they're seeing the need to seek other growth opportunities in the market.

Ed

That creates one: where does the growth come from, but also a challenge for the organizations to understand how much the housing affordability is starting to put pressure on the quality of the mortgage portfolio as well. We're also seeing – in the business bank and outside of the mortgage portfolio – a lot of credit growth happening. Now, the challenge there is to what extent is that good credit growth, and if banks are maintaining their underwriting standards so that we don't see any bad debts coming through later. So far everyone has held up very, very well and the resilience is there, but that will be a good question going forward.

Catherine

It sounds like we're looking into an increasingly competitive market. What sort of strategies do you think banks should consider employing to compete?

Ed

We're seeing a lot more partnerships happening in the market, both typically outside of the mortgage portfolio and in the business banking, and even all the way up into the institutional side. The influx of private credit into the market has both been a competition and a threat to the major banks, but we're actually now seeing that shifting to being a source of opportunity from a partnership perspective, whereby the banks can distribute and leverage their balance sheets through private credit firms. These partnerships are going to be important going forward.

The other strategies are very much internally focused and very much focused on efficiency and making sure that cost is kept under pressure, because the margins are under so much pressure given cost of funding is increased significantly as well. It’s not necessarily a strategy, but we’re seeing a significant amount of people and organizations focusing on having a much more of a surgical attempt to looking at cost. 

Catherine

We have been focusing largely on banks. What's the story for insurers?

Ed

For insurance, the premiums have increased significantly in the home and content space over the last little while. Coupled with the frequency of catastrophes coming through, this has meant the insurance portfolios are under a significant amount of pressure and it means that many Australians will not have insurance for some of the important assets that they have going forward. We have this [volatile] environment that have been coupled alongside high interest rates for the insurers.

Catherine

How can we apply your insights to the industry going forward?

Ed

Well, I mean no one has a crystal ball, so the paper really talks about four different scenarios that every organization should take a look at and analyze – and maybe they'll come up with their own fifth – that ranges from a soft landing to a hard landing. It also includes a scenario whereby we think the private credit could be [present] a lot more in the mainstream here in Australia, similar to what we see in the US today. Whether you believe it, or whether it will happen or not, it's important for every organization to understand what that might mean for their organization to get a bit of a sense around what the path forward may be.

Catherine

I won't ask you to get out of your crystal ball today. Thanks Ed.

Ed

Thank you for having me, Catherine.

Catherine

Thank you for watching.

The New Monetary Order poses challenges and opportunities to financial institutions in Australia. Here's what banks and insurers alike can expect from the higher-for-longer interest rates.

Watch more from the New Monetary Order Video Series and discover how financial institutions are adapting to the evolving monetary landscape.

Catherine Downes

Hi, I'm Catherine Downes and I'm an associate in the Sydney team. I'm joined today by Ed Emanuel, the Australian market lead to talk about the New Monetary Order.

Ed Emanuel

Hey Catherine, good to be here. Thanks for having me.

Catherine

Great. Ed, the main theme of the paper is the New Monetary Order, which is characterized by higher-for-longer interest rates. What sort of challenges do you think this poses for the financial services sector in Australia?

Ed

Thanks, Catherine. This is a series of papers that we have completed around the world because Australia is not alone in having to adjust and adapt to higher interest rates from having low interest rates for quite some time. It's really going to require an adjustment to a lot of the balance sheet settings that a lot of the financial institutions have.

In Australia, one of the key prominent portfolios or areas that are under the most pressure or shift is that of the mortgage portfolio. Low interest rates environment has created housing affordability to be there, and housing growth has been significantly higher than it is now. We've already seen quite a change in the housing portfolios and as a result of that, the banks in particular have been slowing their lending and they're seeing the need to seek other growth opportunities in the market.

Ed

That creates one: where does the growth come from, but also a challenge for the organizations to understand how much the housing affordability is starting to put pressure on the quality of the mortgage portfolio as well. We're also seeing – in the business bank and outside of the mortgage portfolio – a lot of credit growth happening. Now, the challenge there is to what extent is that good credit growth, and if banks are maintaining their underwriting standards so that we don't see any bad debts coming through later. So far everyone has held up very, very well and the resilience is there, but that will be a good question going forward.

Catherine

It sounds like we're looking into an increasingly competitive market. What sort of strategies do you think banks should consider employing to compete?

Ed

We're seeing a lot more partnerships happening in the market, both typically outside of the mortgage portfolio and in the business banking, and even all the way up into the institutional side. The influx of private credit into the market has both been a competition and a threat to the major banks, but we're actually now seeing that shifting to being a source of opportunity from a partnership perspective, whereby the banks can distribute and leverage their balance sheets through private credit firms. These partnerships are going to be important going forward.

The other strategies are very much internally focused and very much focused on efficiency and making sure that cost is kept under pressure, because the margins are under so much pressure given cost of funding is increased significantly as well. It’s not necessarily a strategy, but we’re seeing a significant amount of people and organizations focusing on having a much more of a surgical attempt to looking at cost. 

Catherine

We have been focusing largely on banks. What's the story for insurers?

Ed

For insurance, the premiums have increased significantly in the home and content space over the last little while. Coupled with the frequency of catastrophes coming through, this has meant the insurance portfolios are under a significant amount of pressure and it means that many Australians will not have insurance for some of the important assets that they have going forward. We have this [volatile] environment that have been coupled alongside high interest rates for the insurers.

Catherine

How can we apply your insights to the industry going forward?

Ed

Well, I mean no one has a crystal ball, so the paper really talks about four different scenarios that every organization should take a look at and analyze – and maybe they'll come up with their own fifth – that ranges from a soft landing to a hard landing. It also includes a scenario whereby we think the private credit could be [present] a lot more in the mainstream here in Australia, similar to what we see in the US today. Whether you believe it, or whether it will happen or not, it's important for every organization to understand what that might mean for their organization to get a bit of a sense around what the path forward may be.

Catherine

I won't ask you to get out of your crystal ball today. Thanks Ed.

Ed

Thank you for having me, Catherine.

Catherine

Thank you for watching.