If there’s one thing that has been constant in the financial world it’s been that of constant change. But change is not always for the better. This article explores some of the changes (good and not so good) over the past forty or so years.
I arrived in Australia in 1970 aged 7. I remember going to the bank with my father in 1974 to translate the meeting between Dad and the bank manager.
Dad wanted to borrow $18,000 to acquire a 2 bedroom flat that would cost $25,000. He had a $7,000 deposit which meant the LVR was 72%. The bank manager would only agree to lend Dad $12,500. This meant he had to find the balance elsewhere.
He borrowed $3,000 from a finance company at 21% and talked the vendor into providing him with a payment plan over two years for the remaining $2,500.
He then got two more jobs and – with Mum chipping in and me catching funnel webs and selling them for milking to CSL – we had repaid both the vendor and the finance company within two years. It was a stupid decision by the bank manager as clearly Dad had capacity to repay. It wasn’t a capacity that was apparent in a servicing model.
Over the years, the principals of finance haven’t changed much. What has changed are Government policies, the regulatory environment, the public’s appetite for debt and the banks’ ability to assess risk.
Let’s fast forward to when I got my first mortgage in 1984.
I went to a few big banks and was rejected. I wanted to borrow 95% of the cost of the property.
Paul Keating had just introduced sixteen new foreign banks into our local economy. Many of those were keen to issue you with a credit card. I took up every credit card offer I could and using credit card cash advances acquired my first home at an interest rate of almost 30%.
After five months, I walked into the then Advance Bank and spoke to the manager. After nearly falling off her chair at my sheer stupidity, she approved a home loan within hours. My interest rate had dropped to 12.5%.
Whilst I’ll admit that my actions were stupid and reckless, I felt I understood my numbers better than many of the bank managers that I’d spoken to. What I felt I had lacked was the ability to convey that message to the managers. This I rectified and was rewarded with success.
Banks soon started to limit cash advances.
So, what had changed in 10 years since Dad had gotten his loan?
Firstly, banking was undergoing a massive change, thanks mainly to the Government of the day. In a few short months they had:
- Floated the Aussie dollar• Introduced 16 new banks to the Australian market.
- Deregulated the financial system cutting out many layers of red tape
- Finally, quite sometime later, the RBA achieved full independence to raise or lower interest rates without the Government’s meddling.
Not to be outdone in change, local banks themselves had to change. With sixteen new entrants stealing their best staff, they also had to make changes to remain competitive.
Some of these changes meant that banks took larger and larger credit risks.
One major Aussie bank had taken on so much property related credit risk that it had to be bailed out by the RBA. Yes, you read that correctly: property risk! Sounds familiar doesn’t it?
Perhaps the most significant change to come to banks was the personal computer.
More precisely, it enabled the manipulation and standardisation of mountains of data so that structured financial products could filter down to everyday people.
One such product that benefited the ordinary borrower was securitisation. It enabled non-bank participants to enter the market and create competition to the major banks. Thus allowing for cheaper home loans (albeit not for another decade or so with the growth of Aussie Home Loans, RAMS and other securitisation backed players).
This was a critical competitive injection at a time when home loan interest rates were just starting to fall from 20% or more.
After the 1991 “recession we had to have” banking changed again – cost cutting was the order of the day. The extravagant lifestyles of the 1980’s banker came to a halt. However, the recession eventually ended (much quicker than the GFC). By 1994 banking had recovered and I shifted into corporate banking. For the next 15 years Australian banks didn’t do too much wrong.
There was the odd spike in bad loans but as good credit people know, if you don’t have a few bad loans you’re not taking any risk. Good bankers manage risk. Bad bankers either take on too much risk or worse, avoid risk altogether. The one’s that avoid risk altogether are the most destructive bankers of the lot as they bring a nation’s economy to a grinding halt.
This is what’s been happening since the GFC. Bankers, due to excessive regulation, have avoided risk altogether. The result of this risk timidity is our economy languishing. With banks withholding cash from the marketplace, the economy just doesn’t grow as fast as it should. We’ve not had constant trend GDP growth for around seven years now (except for a brief spike due to the mining boom in 2012). That’s the longest in my lifetime.
For the most part, change has improved banks and our economy. The exception has been the post GFC era, where Australian banks’ balance sheets have swelled (due to a surge in mortgage lending) but the economy hasn’t. This is due to an onerous regulatory framework that means banks cannot lend to many small businesses without incurring excessive capital costs.
Of course, this has allowed private lenders to make inroads at higher margins. But they are a very small percentage of the overall market – albeit growing quickly.
Where to now for banks? Last week one major bank announced that they would not refinance prospective borrowers for solely investment purposes (for residential housing). That’s not a good change. It’s the one I was referring to earlier – when banks avoid risk altogether. The bank has stated that it was due to regulatory compliance. This is where the regulator has limited growth in certain sectors (like investment housing loans) to 1.1 times their share of the overall market per year.
Banking has always been a people business. This has been forgotten by modern senior managers of banks. There is no longer a focus on people (staff, customers and shareholders). There is merely a focus on data and most bankers have learned how to manipulate the data to please their bosses.
If you’ve ever been asked by a banker to award them a 10 in a service survey so that they achieve their Net Promoter Score target, that’s data manipulation. Some people may want to award a six or a seven in certain categories but as the banker explained to them anything less than a 9 is a fail. Faced with the choice of possibly having their banker being disciplined or worse, they (we) find it easier just to award them a 10 out of 10 (whether they deserve the score or not).
This absurd exercise in futility costs banks tens of (if not hundreds of) millions to administer. Worse, they actually promote and pay based on this fraudulent data.
Another favourite of mine is the small business owner who has always had a contact at their bank – usually a Relationship Manager (“RM”). They try contacting their RM only to be told he/she no longer looks after their account. When the client asks who they should call, they’re told that there is no RM currently assigned to them as they’re not profitable enough to warrant one. They are given a call centre number to contact.
The ongoing – and never ending – pace of restructures within banks has meant cost-cutting has severely curtailed customer service. Yes, we have the most efficient banks on the planet. But as the very existence of our business proves, they have become unapproachable.
If you’ve ever received a letter from a bank, it’s very rare these days that there is a contact person provided. Instead, you have to search (usually in the fine print) for which number to call. It’s usually a call centre. Call centres are not an entirely a bad thing but bank call centres tend to use jargon that many of their customers have trouble understanding. This associative juxtaposition has given call centres a bad name.
These days anyone that can come up with a financial structure is usually working for themselves as banks no longer have a need for such creative people. All of their (banks) offerings are formulaic and are designed to fit into a process. If what you need doesn’t, then bad luck. At a previous role, the most senior manager we had despised the word “bespoke”. I understand she’s been promoted since I left that organisation.
I’m hoping the era of regulators running the economy for the government will come to an end. For this to happen, our governments need to recognise that our banks didn’t take the massive bets that their overseas competitors did prior to the GFC. Our financial system suffered from the same crisis of liquidity that all banks did but that was rectified by the government of the day quickly guaranteeing the banks’ obligations (for a fee). That is the role of government and they fulfilled it. Now they need to allow banks to fulfill their role as providers of capital to the economy.