For treasurer Josh Freudenberg it's a balancing act. On the one hand, he is there encouraging banks to keep their loans. But, on the other hand, he may be at the top of the pressure boost that Hein recommends for stricter rules that will prevent the banks from lending.
Freudenberg certainly wants to have full control over the narrative of the government's response to the report. The government will receive a report from the Royal Commission on Friday, and will then publish it and respond to it on Monday in Canberra.
The political response to his moves will come straight on Monday afternoon. The consequences for the financial sector will be the second wave, and the bank's actions will react on Tuesday.
The electorate is equally humble and appalled by the behavior of banks, wealth managers, and insurance companies discovered during a year of hearings by the Royal Commission. They want to be punished.
They also want to see the regulations and laws set up to ensure that such behavior does not happen again, and that from here on ethics and people will impose the profit of the banks.
Whether it was a government or an opposition, to do something less would be political suicide.
For many of the issues raised during Commission hearings there are limited economic disadvantages for stricter regulations.
The most obvious exception is responsible lending. There is no doubt that banks need to be more cautious in assessing whether the debtor has the capacity to continue paying interest. The lender is more cautious about the costs of the borrower.
The traditional ways in which banks measure costs, and in particular the use of the external benchmark, the household consumption measure (HEM), is not good enough. A thorough investigation of the borrower's costs is needed, as was appropriate verification.
From most accounts, banks have raised their game – an attitude expressed by their regulator, the Australian Prudential Regulatory Authority.
But Kanbera is aware that ensuring that banks comply with the responsible lending law (which has been set up for years but inadequately monitored or controlled) will further limit the credit rating and may have many unpleasant effects across the economy.
As with most issues related to the bad practices of financial institutions, those who are supervised work to overcome problems and to deal with some of the underlying reasons – such as reward models.
Compensation for affected users is also on the train. Some institutions have corrected the correction from others.
When it comes to responsible lending, the banks are not indifferent. It is now less reliant on HEM alone, and banks become more conservative for mortgage lending.
The prospect of further restrictions on their ability to supply credit and their appetite for securing loans, especially as the housing market falls, will have a negative effect on the economy.
From the perspective of labor, the answer is clear. Opposition blogger Chris Bowen said in a recent interview on the Australian Financial Review: "Your standard position should be if the Royal Commission recommends it, it will be done."
Bowen argues that current uncertainty over credit standards is the culprit, and after Hayne's report is published, banks will have the incentive to lend.
This sounds like empty thinking.
The banks are likely to be told to comply with borrowing laws, make thorough checks on borrowers' costs, use comprehensive credit reporting tools, and give up the default HEM as a tool to determine how much to borrow .
Combined with almost abolishing volume-based stimulus payments for employees or mortgage brokers, it is easy to see that the growth of loans will come under intense pressure.
Elizabeth Knight commented on companies, markets and the economy.