Murray Inquiry to boost small business lending

By Leith van Onselen

The AFR’s Chris Joye has published article today arguing that the Murray Financial System Inquiry will likely drive the major banks to increase loans to businesses as increased capital requirements on mortgages makes housing lending less profitable:

The Murray inquiry could also drive a dramatic increase in major-bank lending to small businesses and companies as the 67 times leverage (or 1.5 per cent equity) they currently employ when lending against Australia’s housing market shrinks significantly. More equity and less leverage mechanically yields skinnier returns on home loans, which will making lending to business relatively more enticing…

While business loans do necessitate higher equity capital, and lower leverage, the striking differential in their capital treatment vis-à-vis home loans will compress, which makes business lending more attractive…

So as the majors lose home loan market share, they will probably boost their balance-sheet exposures to business lending. This will please the many experts who believe the big four are too dependent on Australia’s toppy housing market.

This would be a great outcome given the extreme concentration of bank lending in housing (see next chart), which is productivity destroying for the Australian economy.

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