Way back in 1985, the Hawke/Keating government threw the financial markets’ doors open. 16 new banks were licensed and allowed to operate in the Australian market. It was a new era. We should finally get some competition. And we did. That’s a far cry from the re-regulation being enacted today.
In the institutional market competition became very fierce. Our institutions never had it so good. A few retail players – in partnership with some smaller locals – even tried to tackle the retail banking market. The Aussie dollar had been floated a couple of years earlier. It was game on. De-regulation of the banking sector had been unleashed.
Bankers’ pay packets doubled then doubled again. It was a good time to be in financial services and a good time to be someone who was a client of a bank. That decade ended in recession – with double digit unemployment and inflation and real interest rates that peaked at around 20%. Over the course of the next five years, the retail foreign competitors all but withdrew from the market. The market-share of who’s left is now so small as to render them a statistical rounding error.
Then growth again…this time the competition came from home grown middlemen which were backed by investment banks. Thanks to their new found religion (securitisation) they took around 25% market-share away from the four major lenders. Again, all was well. Sort of. The GFC put an end to cheap funding for non-banks.
For a while, even banks found it difficult to get funding. The middlemen were swallowed up by the big banks. Enter the Federal Government and its guarantee of the banks. With the odour of the Lehman Bros. carcass fresh in the global nostrils, the Government bureaucracy had an overnight contingency liability on it’s books that it had never previously had.
Given our banks were too big to fail (the collective wisdom suggests that if one fails, they will probably all find it difficult to survive – although I’m not so sure about that), something had to be done.
While all of this was going on, an international body known as the Bank of International Settlements (BIS) was working on it’s third version of regulating the banks (widely known as Basel III). The GFC meant that their work was accelerated and ensured that banking would become risk free and boring once again. In short Basel III was an exercise to turn the clocks back with the BIS attempting Re-regulation of the global banking sector.
Enter APRA, our banking regulator. APRA has imposed some of the strictest interpretations of Basel III on our lenders. More importantly, APRA has been very active in ensuring that the banks processes do not stray from their strict adherence to Basel III. In short, Basel III makes it uneconomic to lend to borrowers at the riskier end of the spectrum.
So, if you are buying a house, the bank takes security over your house. If you borrow more than 80%, the bank takes insurance out on you and mitigates your perceived higher risk. All good. But if you’re running a small business with great cash-flow but don’t have property as security…good luck.
There is no rule saying that banks cannot lend to unsecured borrowers. It’s just that they would need to post so much capital against the loan (in comparison to a property secured loan) that it makes the return on that capital very low and thus very unappealing.
The problem with this approach is that the nation’s (any nation that complies with Basel III) capital is channelled into a narrow field of investments – like property and highly rated institutions. Entrepreneurs are discouraged (unless they have property as security). Innovation is also discouraged. Currently, these borrowers need to enter the murky world of private funders.
This neck of the woods is unregulated and very expensive. It is so laden with fees and higher rates as to render it usurious to any prospective borrowers. But borrow they do. It would be easy to just blame APRA but the banks have also changed their processes in their never-ending pursuit of a better cost-to-income ratio.
The “juniorfication” of banking has seen talented senior bankers with many years of experience let go in favour of younger (cheaper) bankers. Bank executives will argue that banking has moved from being a talent/decision driven business to a process driven one…and they’d be right. The problem arises when you speak with clients.
I have written many times about bank clients that were used to dealing with good bankers and now are left at the mercy of process. This is frustrating clients to the point where they just want to leave a bank to make a point. While we are seeing overseas funding and some institutional funding come into the country to take advantage of the massive gap in our market left by the banks, it is not enough.
Those that argue that technology will play a role may be right but right now it’s not helping. There are plenty of peer-to-peer lenders, B2B lenders etc. Again, their market share is a statistical rounding error. What’s the answer? If I knew that, I wouldn’t be spending my Saturday morning writing this drivel. But here it goes…
You would think that sovereign states would be demanding the BIS come up with a regulatory framework that not only protects the global financial system but also allows banks to take on a modicum of risk. The reality is that Basel IV is rumoured to be even more draconian than Basel III. Industry media reports suggest that Basel IV will include a greater emphasis on increased capital and a crack down on individual bank risk weighted assets (RWA) calculators.
If a global standardised RWA calculator is adopted, this will result in any minor differences that banks currently have at arriving at a risk decision will be taken away from them. If this (the media speculation about Basel IV) is true banks will stop being the go-to institution for the majority of borrowers.
Usually in scenarios such as this you would expect substitute lenders to be springing up everywhere. The good news is that they are. The price you get from these lenders is currently expensive but is expected to come down in time as more lenders enter the market.
So, why aren’t sovereign states jumping up and down? That’s simple. Faced with a choice of low growth and deflation OR bankrupted banks…they have understandably chosen the former. I’m just not sure that the choice is as black and white as that.
Whatever is done, it’s clear that the current regulatory framework has been very successful in reducing risk (or has it?)…and at the same time starving nations of capital. No growth will be possible without this lifeblood of the capitalist system.
Re-regulation is not yet complete but it sure is heading in that direction.