Conflicted Murray makes sense on inquriy

From Banking Day, the conflicted head of the banking inquiry, David Murray,  made sense yesterday:

“Wallis was more about the regulation of the system. It had narrower terms of reference than we have. It made progress on regulatory structures. Campbell had to deal with how to manage a system that was almost fully regulated and was moving to an open economy. It became a bit of a blueprint for operational efficiency, allocative efficiency and dynamic efficiency. We are looking at those things too but in our case we are asking how well the deregulated system has worked. People went back to first principles with Campbell. We can do that. Like Campbell, we can lay down a blueprint for our financial system….Do we want to be more like Europe and the US or more like Asia and the people we want to be growing with.”

This is exactly the question that the inquiry should be addressing so that’s encouraging. The question is: can a conflicted David Murray, with a career in building a contemporary bank, address the trickiest question at the heart of this thesis, as illustrated by the following chart:


Why have banks so dramatically reoriented their businesses towards productivity-eating mortgages and how can they be tilted back towards lending to productive enterprise?

David Llewellyn-Smith
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  1. > … how can they be tilted back towards lending to productive enterprise?

    Simple – flip the chart upside down accidentally, and press “publish”

    It’ll make it to that sunrise clown’s tablet (David Koch) and he’ll have another rant on how it’s easier than ever to buy a house.

    Job done, and all before lunch!

  2. Banks at the moment are actually very keen to write business loans. the issue is that the business must be creditworthy with good future prospects for ongoing profitability.

    The problem isn’t banks, it’s the absence of government policies that encourage production and our ability to compete with overseas manufacturers. Our commercial borrowing rates are much higher for a start, and there is the issue of the dollar.

    If we aren’t going to protect our local industries then other means of encouraging them must be found. Other countries get around the issue of tariffs but somehow we can’t

    • You’re mock concern it touching, PF, but as a spruiking mortgage broker you really are part of the problem rather than the solution.

      I’m verging on banning now, or reiterating personal abuse. Not sure which will come first!

      • Why am I part of the problem, I arrange business loans as well as home loans.

        Are you also going to ban everyone else who has a view?

    • I think its more subtle than that Peter / b_b
      I think there are two issues here which makes this chart a bit misleading

      1. Most small businesses will generally fund from their own mortgage. They can do this because over the last 15 years new products such as re-draw and offset have given the homeowner more flexibility with funding. From a Bank point of view, it is lower cost funding (lower RWA). It is therefore no surprise to see traditional business leading decline as a share of total lending. Bottom line, a lot of small business lending shows up as residential mortgage lending.

      2. At the bigger end of town, the development of debt capital markets (DCM) has allowed larger borrowers to tap the domestic MTN (medium term note) market. This is not bank lending and also skews the ratio.

      As posted by me for +5 years on various site – loans create deposits. The Bank of England now agrees. This means there is always enough bank “funding” for business – the issue is price and risk. The two points above means the way be borrow has changed – that’s all.

      • I don’t disagree. Also agree with the point that most small business simply tack an LOC onto the family home to fund their overdraft requirements.

        We could go further and add that invoice discounting has come a long way from the time that it was treated as the last resort for a failing business, it’s now mainstream and the confidential facilities take it to a new level.

        Most of that financing is outside the banking sector so it doesn’t get counted.

        But still banks are more than happy to write business loans. they just need quality applicants.

    • moderate mouse

      @PF ‘The problem isn’t the banks….’

      Just like the problem in housing isn’t excessive credit, it’s too little supply right Peter? Throw up a diversion based in half-truths and hope the money merry-go-round keeps spinning.

      The problem is the banks. The problem is the Big 4. The Big 4 are too big to fail. TBTF = massive moral hazard which leads to negligent risk management and excessive credit.

      David Murray needs to look at how TBTF can be unwound, and how risk can be better apportioned between lender and borrower, rather than all on the borrower side as it currently stands.

  3. Crocodile Chuck

    The problem isn’t banks, it’s the absence of government policies that encourage production..” (snip)

    I’m calling BS. Like, any examples?

    Until then, I’m sticking with high land prices as the driver of high costs for start-ups in all capital cities.

    • Why – a start up doesn’t need to buy land.
      Rents are not that high unless you mean rents in shopping malls. Not many factories in shopping malls.

      • rents for warehouses, offices, factories, the neighbours garage, whatever.
        Don’t superimpose housing costs onto commercial considerations.

      • Sure PF – because people working for those businesses are just irrational – they just ask for a high wage because they can, not because their own housing costs are high.

        I guess the point is that try as you might, you can’t really dissociate the cost of a business from the land-cost. And just ignoring it and asking everyone to do it doesn’t make it go away either.

      • Rents are not that high

        Are you serious Peter? Talk to some agents, they’ll set you straight. Ask them how much per month for 1000m2 in an industrial estate outside of Brisbane, Sydney or Melbourne. I think you’ll be very surprised at just how expensive it is.

        Anyone starting a businesses gets belted by high land prices twice actually, through rent of the space as well as paying their employee’s mortgages.

  4. Murray will prove a fine choice. He has reinvented into elder statesman philosopher. Bonus – also one that understands the sector well from practitioner rather than academic perspective.

    • He is definitely at the age and stage of life where he no longer has anything to prove to anyone, is very unlikely to be beholden to anyone and probably wants to leave a positive final legacy. Australia could do worse than make greater use of his ilk.

  5. come on guys, the changes in Basel many years ago correlates very well with the change in bank lending approaches. the facts are that you can lend more per $ of equity for a home loan vs. a business loan.

    home loans as a global commodity have probably crowded out business lending in most of the western markets since the implementation of Basel 2 – that’s just speculation but it would logically make sense

    what will change the above? home loan losses that would adjust the capital charges and rebalance the whole equation. i don’t think there is enough capital based on the Basel accord so its just a matter of when – noting pro housing political agenda will kick the can down the road as much as possible….

  6. This is a big chicken-egg problem. From living in the US, the “stocks culture” was very evident. Everyone ploughed their investment $ into stocks, because a) they believe thats how to get rich b) Americans (justifiably) have confidence in their businesses to innovate, succeed and beat the competition. Noone I ever spoke to invested in RE, people owned holiday homes to be used as such, and thats pretty much it. Outside of a small subculture of apartment-block-buyers and other flippers.

    To an extent, banks just reflect the culture of their customer base. If people start and invest in businesses, they will fund them. If people invest in houses then banks will meet the needs of that market.

    To break this, Aus needs to positively act AGAINST RE investment and FOR business investment. This will be extremely hard. UK is in a similar position but not as extreme.

    • That prompts an interesting idea: maybe we should require banks to make margin calls part of their terms for property investment loans. Might focus a few more minds on the risk element involved.

  7. Mortgage lending growth was a rational response by banks to Basle’s risk weighted capital adequacy model.

    The big question is how much of the mortgage lending is actually just small business finding a cheaper way to borrow for their plant, equipment, premises and funding of working capital grwoth as businesses (or some of them) grow.

    Why on earth would anyone who has to borrow for their business and give personal guarantees not give mortgage security for as much as possible to get the much lower rates when, with propoer accounting even the lower rate of interst is tax deductible?

  8. Productivity gains at the margin are often almost costless.
    Where banks could contribute is by acting as Venture Capitalists with respect to re-tooling, business growth, RD&D, and start-ups. This requires expertise which is in short supply in Australia. Most VC’s in Australia are “vulture capitalists”. Our commercial banks’ interest in RD&D and start-ups has been driven by the 125% and 150% tax deductions.
    Lacking expertise beyond being able to read the business plan and assess the credit risk of the business borrower, our banks expect asset-backed security, preferably real property, for their loans. There should be a boot-strapping effect of rising asset values, on business loan volume, but instead we see a relative decline.
    Since an entrepreneur cannot capture all the benefits of her/his innovation, (s)he should not be expected to bear all the risk. Perhaps, as part of a bank’s social licence, it should be mandated that a minimum percentage of bank shareholder equity should be at-risk in non-bank business growth.