This week I’ve underlined two important tasks the Turnbull Government has to do. The first is to talk about how much the economy has improved. The second task is to talk even more about how it will improve. Yesterday, we saw that small and medium-size businesses were at their best confidence levels since the GFC. However that could change, if the Royal Commission gets its way and Bill Shorten ends up being Prime Minister and his set against the banks holds true.
If that happens, a PM Bill could do a Kevin Rudd, who decided to fry the miners for political purposes with the mining tax, just when the mining boom was on its last legs. In the same vein, our economy could be going off the boil by the time Bill wins the next election and given what we’re hearing about lending now because of the Royal Commission, our economy could already be under challenge.
Back in May, the boss of ANZ, Shayne Elliott, explained the backwash from the Royal Commission.
"People are still going to want to buy and own a home, so it’s not like any of this changes fundamental demand, but it will change the process and it probably will make it harder for people to be successful in their applications," Mr Elliott was quoted in the SMH.
The upshot of the Commission has meant banks are running very hard forensic tests for borrowers to pass before they get a loan, and ASIC is making sure they change their ways. Instead of making a rough assessment on a borrower using standard rules of thumb, after knowing his/her income and what they own and owe, lenders want to know precisely what people spend on each week. Do they pay private school fees? Where do they holiday each year — the Gold Coast or Greece?
And property investors and businesses are being tested more rigorously, which sounds responsible but it’s slowing up and reducing lending. And this will slow up buying, hiring of builders and other service providers and becomes a brake on economic growth and job creation.
“It probably means that banks are going to be just that little bit more cautious, either just psychologically, because of a little bit of fear, or putting in place more processes, and in that environment, that will just slow things down I imagine,” Elliott explained.
So Bill and all of us have to be careful about our bank bashing because love ‘em or loathe ‘em, they do grease the wheels of homebuying, business services and actual production of real things like coal, wheat and beds!
Banks and business have had a small win with ASIC backing down on the size of a loan to a business, where the protections of the Banking Code of Practice will apply.
It was thought that if a business borrowed up to $5 million, it could have protections akin to what a consumer might have but that now has been peeled back to $3 million. And let’s face it, not many SMEs even think about a $3 million loan. If they do, they certainly aren’t planning to be small for very long!
And if you think I’m exaggerating about the new reign of terror for bank borrowers, look at this story in the AFR yesterday.
Patrick Durkin told us that “One of Australia's 100 richest people, tech entrepreneur Christian Beck, says he can't get a loan from the bank and blames the Hayne Royal Commission.”
This guy was ranked 99th on the AFR’s Rich List but can’t get a loan because he’s having trouble with the new criteria for getting one.
"I sold $148 million worth of shares last year,” he told the AFR. “I had a lot of capital gains and around $40-to-$50 million in the bank. I am trying to borrow $4-to-$6 million against property, only geared to about 60 per cent. The bank won't give it to me because the APRA requirements around serviceability I don't meet."
Clearly, assets don’t count but cash flow does but does this guy really need protection? And if we are going to put controls on multi-millionaire entrepreneurs, along with ordinary borrowers who want to stretch themselves to get ahead (and many now wealthy people have done that for property plays), then this Royal Commission will have protected some battlers, who needed help. But it could also KO the economy.
Someone in Government (it’s going to have to be the Prime Minister because clout is needed) will have to put an adult in charge when it comes to banks and what they can lend, for the sake of the economy. But we have to careful that the nanny state doesn’t go too far. Borrowers need to take some responsibility for their loans.