Federal Election 2010 | Leaving banking behind | Robert Gottliebsen, Election 2010 | Commentary | Business Spectator 20/07/10 8:21 AM

Commentary Comment

Leaving banking behind

Robert Gottliebsen, Election 2010
Published 8:06 AM, 20 Jul 2010

We have the ALP “Moving Forward” and the Coalition promising lower interest rates, but neither
is alerting the electorate that they will have to tackle deep problems in Australian banking to
achieve either aim.
I suspect neither Julia Gillard nor Tony Abbott has any idea what is ahead of them, or the fact
that the winner on August 21 may find that during the next three years Australian banks will be
forced to shrink their balance sheets.
This would not only crimp credit availability for housing, but savage employment, creating
smaller enterprises that are already suffering under current banking rules.
These sorts of forecasts are normally the province of academics, but last week NAB's group
executive for business banking, Joseph Healy, lifted the lid on the dangers facing Australian
banking at an American Chamber of Commerce lunch (The banks’ mortgage bias, July 16).
The banking issue facing the next Prime Minister must be added to the fact that there are clear
indications that the Australian Treasury may have been too optimistic in its global forecasts
(When election intentions fall apart, July 19).
Healy’s “shrink” warning is simple. Using UBS research he says that if Australia were to have
an 8.5 per cent growth rate (which is about the gross number Treasury is forecasting) it would
need to lift its global debt wholesale funding balance from $257bn to $800bn by 2014.
This would test global debt markets because even with $257 billion in global funding, Australian
banks are already among the largest international bank borrowers.
There is a risk that foreign investors will also be faced with substantial borrowing demands from
banks in other markets, governments (many of whom are running sizeable deficits) and
corporates. In these circumstances the foreign investors “may have a limit on their appetite for
Australian bank paper”.
“If there is a concerted effort to reduce reliance on wholesale funding and increase the net
stable funding ratio as proposed by APRA, together with the steps proposed under potential
new international bank regulations constraining bank leverage, then one possible consequence
is that there will be pressure on Australian banks to shrink their balance sheets,” Healy says.
Healy does not spell it out, but rather than shrink Australian bank balance sheets, an alternative
would be to lift Australian deposit interest rates to a level that would cause Australian savers to
fill the overseas gap. Assuming the extra costs were passed on to borrowers it would hit values
of property.
The problem of possible limits on overseas wholesale funding for our banks multiplies the
danger for smaller enterprises which, according to Healy, are suffering under the existing bank
rules.
In 2000, every $1000 of home lending was matched by a roughly equivalent amount of business
lending. Now in 2010, for every $1000 of home lending, there is only about $600 of business
lending.
Healy says the international Basel II capital adequacy rules which took effect in Australia in
2007-08 implicitly encourage banks to favour residential mortgage lending over business lending
because residential mortgages attract a lower capital charge under both standardised and
advanced accreditation frameworks.
“This means that banks can do on average three to four times more mortgage lending relative
to business lending in terms of capital management,” Healy says. And while interest rates on
small business loans are higher than residential mortgages there is also a higher failure rate.
“All other things being equal, we have a system that makes it more attractive for banks to lend
the marginal dollar on a weekend holiday home than to a small business! One could reasonably
regard this outcome as perverse,” Healy says.
In my view, the long-term effects of this mismatch on employment growth will be devastating
and may require the government to step in and direct banks to lend to smaller enterprises
(Giving credit to SMEs, July 19).

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Federal Election 2010 | Leaving banking behind | Robert Gottliebsen, Election 2010 | Commentary | Business Spectator 20/07/10 8:21 AM

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