When we go for a drivers licence we are classed according to the type of vehicle we’re trained in. Most of us would not be allowed to drive a semi-trailer without the appropriate training and licence. Each year we re-new those licences.
Banks are similar in that APRA conducts ongoing assessments of banks’ risks, balance sheets, large exposures etc. What it doesn’t do is look at sectors that banks aren’t lending to. In the past few years banks have stopped lending altogether to various segments of the economy. Valuable skills are being lost permanently as staff that used to understand those segments are being let go.
If a semi-trailer driver has not driven one for a few years is it time to let his/her semi license lapse? He/she can continue to drive a car though.
In June 2013, Australian Banks finished at the top of Bloomberg’s Riskless Return Rankings. Is this something that we should be proud of? Most of us are. They achieved this by exiting many small business segments.
When economies are performing above trend, banks can’t give you enough money. So why then do they stop lending when recession hits (or an economic downturn). Surely this is when businesses have undergone serious stress testing and come through.
This article assumes that banks have a responsibility to provide liquidity to the economy. If they stop doing that, Governments (through the regulator) should act to takeaway that part of the license that is not being utilised. For example, if a major Australian bank stops lending to a particular segment for an extended period of time, they should forfeit that segment for an extended period of time. The logic being that they have lost the skill set to lend to that segment. That portion of the licence should be re-issued to other lenders that are willing to participate in that segment.
We know that some foreign banks have been issued licences with the condition that they only lend to institutional clients. Our experience has been that they would love to participate in the business banking segment but are prevented – by the regulator – in doing so. This folks is a government sanctioned closed shop.
Is it time to think about licensing Australian banks along segmented lines? Is it also time to start replacing that part of banking that they have lost skills in and replacing them with either foreign banks or non-bank lenders? Our current licensing regime doesn’t allow for what I’m proposing, but the current regime is holding us back.
Riskless lending should not be encouraged as banks need to take reasonable risks to encourage entrepreneurial behaviours. Let’s look at what’s happened in the Australian economy since the GFC. Banks have encouraged any entrepreneurial lenders within their ranks to exit. They have focused on tick and flick approval of credit – leaving no room for interpretation. Bankers have been stripped of credit authority. Senior management worry more about cutting costs rather than increasing revenue. Process has overtaken proper credit analysis as can be seen in the massive white collar factories that have sprung up in suburban areas.
Don’t take my word for it. Ask yourself this: If you’re a small or medium sized business owner, how many times has your bank changed your banker in the past four or five years? (Also, ask your new banker how many additional clients he/she now has compared to five years ago.) If your answer is more than twice, was it as a result of restructure after restructure? Do you have access to senior management? Have you challenged them?
Coupled with the exit of foreign banks, the above has meant a dramatic decrease in lending to borrowers that would’ve easily been approved pre-GFC. If a potential borrower is rejected by a bank only for reasons of a lack of security – that is, as well as putting up his/her business as security the bank will ask for the family home or cash – then the bank is avoiding (not managing) risk.
To be fair to the bank, Basel III has pretty much ensured that this behavior will prevail. If the borrower’s business metrics show that he/she can repay comfortably and the bank has a charge over their business, then why not approve? I’m not singling out any bank. All are guilty of this. Some – to their credit – have recognized this and are trying to lend “unsecured” but progress is very slow. If you’re wondering why property is so popular, try taking out a loan from a bank without one.
Until then, don’t try driving a semi-trailer.