Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 469

Michael Witts: changes over the final 12 years of my career

Introduction: Following a career of more than 40 years in domestic and international financial markets, Michael Witts retired as the Treasurer of ING Bank Australia (IBAL), a position he held for more than 12 years. IBAL is a significant participant in the Australian mortgage market. This article reflects upon his observations over the years especially in the mortgage market, regulations and the dynamics of funding opportunities.

Mortgage market

Over the past 20 years, innovation in the mortgage market has continued at a rapid pace. Competition in the sector remains intense, with the increasing role of brokers meaning that a mortgage is seen as a commodity, which can be readily substituted from one provider to a second or subsequent provider.

From a consumer viewpoint, this has been a positive development, with sharper pricing becoming more widespread. From a mortgage provider viewpoint, previous generous margins have been partially eroded, with a value exchange in favour of the consumer. Despite this erosion, the return on equity on Australian mortgage books remains attractive on a global basis.

The distribution of mortgages via brokers has enabled participants to broaden their geographic footprint beyond their traditional market. The enhanced geographic spread has reduced location related concentration risk. In addition, the broker channel supports new entrants to get their products into the market in a more efficient and cost-effective manner. This contributes to increased competition.

The recent introduction of 10-minute mortgage approval process is to be applauded, however, as with most things the devil is in the detail. In a drive to improve mortgage approval turnaround times, credit decision engines are used to automate the process to the maximum extent possible. The quality of the decisions that result is a function of the design of the rules. While these will work well for loans that are clearly strong (approved) or weak (declined), there is the potential for the population in the middle to generate several exemption escalations and/or adverse customer outcomes. This should be a watch point as these programmes gain momentum.

Fintechs and new banking participants

The doors are open for new banking participants to enter the market. Generally, they benefit from having no legacy systems and their technology is cutting edge, however, they lack customer numbers to achieve economies of scale. As a result, they need to closely manage their cash burn rate during the early years. Improvements in the technology employed by incumbents, together with Covid, has seen many of the newer participants exit the market.

The alternative outcome has seen new participants being taken over by more established financial institutions. This effectively results in a dual banking technology stack being used within institutions, where the 'old' and the 'new' bank run side by side, with the end game that existing customers are transitioned to the new technology. This approach is likely to be repeated in the future. Also, it further underlines the power of incumbency and an existing customer base.

Impact of regulation

A key outcome of the GFC was a series of regulatory changes designed to improve the liquidity self-sufficiency of banks. The driver of this was that public funds would not be required to bail out the banking sector in the future.

While these measures have achieved the objectives of strengthening bank liquidity and funding models, they have also made explicit the cost of providing market liquidity. In many cases, banks have opted to decrease or cease their market making activities.

Consequently, volatility in financial markets has increased significantly, especially at times of unclear or turning market direction. The first half of 2022 has been characterised by extreme volatility across equity and financial markets. Market observers agree this year has been potentially the most volatile in recent memory due to a turning monetary policy cycle. This reflects the sharp jump in inflation and inflationary expectations, surging commodity prices, especially energy, stemming from the war in Ukraine and Covid-related supply chain issues across the globe especially in China. Mixed messaging from central banks has compounded a volatile and fragile environment as Covid was being unwound.

Funding options for non-major mortgage lenders

Retail deposit funding has been a key source for major banks to fund their asset portfolios, especially their mortgage books. The major banks continue to tap into retail funding options, in addition to longer term wholesale funding alternative (both domestic and offshore), including medium term notes, residential mortgage-backed securities (RMBS) and covered bonds.

In contrast, mortgage lenders without access to significant retail funding alternatives rely on warehouse funding facilities pending the issuance of RMBS bonds to generate term funding. Prior to the winding down of the Committed Liquidity Facility (CLF), the major bank balance sheets were strong supporters of the RMBS market, as assets that could be pledged as collateral for the CLF were available at attractive spreads relative to alternative assets with similar collateral features.

In September 2021, APRA advised CLF banks that the CLF would be reduced to zero effective end December 2022, reflecting the growth in government and semi-government bonds on issue arising from the fiscal impact of Covid. Hence, the rationale for the CLF, the previous shortage of government and semi-government securities, (High Quality Liquid Assets, (HQLA)) was no longer applicable. This resulted in a transitioning of demand from RBMS towards HQLA.

The decrease in demand for RMBS became quickly apparent in late 2021 and continued into 2022. In practical terms, this translated into smaller individual deals and wider spreads. The continuation of this trend appears likely and means that competitive sources of volume term funding for non-major lenders in the mortgage market is reduced, increasing the risk that price competition in this sector could lessen.

Conclusion

The Australian mortgage market and associated funding markets have successfully responded to changing customer expectations and the dynamics of funding markets over many years. While at times these elements may get out of line, through the combined efforts of market participants and regulators working with a positive co-operative approach, issues have been resolved. Innovation, with a focus on customer outcomes, will continue to drive the market in future years.

 

Michael Witts has worked in domestic and international financial markets more than 40 years and is the former Treasurer of ING Bank Australia (IBAL), a position he held for more than 12 years. These comments represent the author’s observations only and should not be considered to be the views of IBAL or ING.

 

RELATED ARTICLES

Financial pathways to buying a home require planning

Banks are punishing the most vulnerable

Is it time for an Australian 30-year fixed rate mortgage?

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.