Credit supply or demand limiting business?

Mac Bank speculates that it is credit supply not demand that is behind recent weak bank business lending:

While weak business confidence and borrowing intentions have been considered the drivers of weak business credit growth, we believe an all-too-overlooked factor in weak business credit growth is banks‟ willingness to lend, which is really a reflection of bank confidence.

While it is a difficult variable to measure, particularly given Australia does not have its own Lending Officers Survey (like in the US), there are indicators that may be of use. One particular measure that may be useful is the Westpac/ACCI “Difficulty in Obtaining Finance‟ measure (as discussed in the RBA Research Paper – The role of credit supply in the Australian Economy).

There is some evidence that on a 12-month lagged basis there is a strong correlation between business credit growth and “Difficulty in Obtaining Finance‟.


Given corporates are experiencing significantly less „Difficulty in Obtaining Finance‟ and credit growth has yet to move materially, we believe that there is a good chance that an improvement in credit growth is on the way. This is consistent with our view that there is recovery on the way in business credit.

Meh. Business lending costs have been falling for two years and so has business lending from what appeared to be a recovery underway in 2011. We may see a pick next year but with the broadening of credit growth in housing and related industries already underway it will be difficult to apportion that to supply.

One sure way to boost the proportion of business lending would be to change the risk weights used by the banks to determine capital reservations, by removing the discounts applied to mortgages. It may cause short term pain as mortgage supply diminished but the dollar would fall with lower interest rates and property prices. Lending would shift to the tradable sectors of business in the recovery.

Fat chance!

David Llewellyn-Smith
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  1. You speak of a lower dollar as if it is a cost free panacea for all that is wrong with the world.

    All economic measures have winners and losers.

    A lower dollar might help employees in manufacturing but it will hurt those employed in distribution of imported products.

    It will reduce the internationalised wealth of all Australians, including reducing the ability of our corporates to expand overseas.

    It will reduce our ability to improve our Net International Investment Position, reduce the buying power of most households, and reduce the ability of every household to have great value for money cars and the benefit of overseas travel.

    It will make it more expensive to repay any unhedge foreign debt whther held by the RBA, the government or the private sector.

    For the moment, the world regards us as a great quarry and pays us well to perform that role. The currency will corect when the world no longer values that role. In the mean time, if the world wants to pay too much (which is what happens with our exports when the currency is supposedly overvalued), then why shouldn’t we take advantage of that?

    • Because all we actually do with ‘the internationalised wealth of all Australians’ is blow a massive property bubble ever bigger.

    • HnH continuously calls for lower interest rates citing the dollar as the rationale…..

      Oh oh… now I’ve said it, watch the beehive come in with comments “it’s not calling for them to lower it is just the reality”… same thing isn’t it?

      Then you have a piece like this which somewhat contradicts that position.

      If falling lending costs don’t lead to increased business lending …… then why on earth would you want to lower interest rates as all that would do is increase mortgage lending (and not lending into the real economy).

      In fact, I wonder if increasing rates would actually result in less demand for mortgages and free up some of that balance sheet for business lending…

      There’s a thought.

          • At this point, does it really matter what we do? We have to swallow whatever China and America wants to put in our mouths and hope its not poisonous. Thats our job.

      • Falling borrowing costs haven’t increased business borrowing because investment demand is weak. Investment demand is weak because the dollar is overvalued.

        Lower interest rates have also boosted share prices. But higher share prices have not led to increased capital raising. The reason again, investment demand is weak because the dollar is overvalued.

        • We are in the midst of the biggest mining/processing/transport infrastructure boom of all time. There is plenty of investing going on.

          However, the investment is all but invisible to 90% of the Australian population who don’t live where the investment is taking place. I have to admit to being mightily taken aback when visiting the Pilbara, Kimberleys and Darwin last year in spite of having read many times of the size of the capex involved.

          It is also possible that a lot of that investment is being funded by foreign sourced equity and debt, and that some of the debt is not intermediated by Australian institutions given the size of the amounts, the degree of overseas ownership and that some of it mioght be denominated in USD to match the currency of contracts.