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Analysis: The misnomer of bank regulation and loan costs

Analysis: The misnomer of bank regulation and loan costs

With bank sins being on public show at the royal commission, there are many warnings that any move to tighten regulations will crimp SME access to credit. But don’t be fooled by this well-oiled PR machine.

In the commission’s hearings into SME lending so far, we have seen examples of bankers:

  • making irresponsible loans and failing to do proper checks to meet internal targets
  • penalising customers for bank errors
  • issuing pre-filled and pre-witnessed documentation
  • suppressing information of system faults causing overcharging

And that is just to name a few.

So it begs the question: how can tighter lending restrictions damage the economy? Surely banks that are stronger, with lower impairment rates because they have lent prudently, and with lower (or ideally, no) penalties for compliance breaches, actually make the overall economy less exposed to risk, and that can only be a good thing?

Yet that is exactly what some — including federal Treasurer Scott Morrison and global credit ratings giant Moody’s — have suggested in the past week.

As for the claim that reduced credit availability and/or increased cost of loans will be the result most felt from the royal commission, forgive me for being sceptical — I have a major case of déjà vu. This is a well-worn line trotted out by the banks whenever ANYTHING is proposed that they simply don’t like. 

Better enforce bank compliance? We’ll charge you more. Additional regulation? We’ll stop lending. Don’t give us the tax cuts we demand? Up go your interest rates. Won’t let us buy out our competitors? That’ll cost you too.

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The rest of use have much less wiggle room when it comes to obeying the law, as SMEs in particular know only too well.

As this commission has brought starkly into light, our banks are not just good at making money — they are really good at spin.

The very first witness into this round of hearings — Philip Khoury, a business consultant who helped review and redraft the banking code of practice — framed the entire commission by stating these arguments about higher costs and lower access to credit don’t have merit.

The commercial reality is that SME lending remains very profitable for the banks. And coming off the back of a major property boom, they are likely to rely on it even more heavily to maintain their fat profits as demand eases for residential loans.

Add to that that the banks are trying to fend off competition from a hungry and rapidly growing fintech sector, who threaten their market share of the lending space.

So while such threats may have been valid in the past — in turn stoking current fears of a repeat should tighter lending restrictions be introduced — there is a hollow ring to the bank’s threats this time around.

The banks would simply hand over thousands of customers to their nimble start-up competitors, that already benefit from lower overheads and brands untarnished by poor behaviour.

Also lost on a lot of people is that Australia already has some of the tightest lending and banking regulations in the world — a factor credited with helping us stave off disaster during the GFC.

As such, it isn’t more regulation that is needed to keep our banks in line, but better monitoring of the existing rules.

What we need is better enforcement of the existing rules, to ensure full compliance and disclosure is provided according to current regulations.

Banks have ruled the roost and crowed their own tune for way too long; it is now time for the regulators to stand up and keep the flock of squawking hens in line.

Analysis: The misnomer of bank regulation and loan costs
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