Don’t punish small business for the excesses of the derivatives market.
The Council of Small Business of Australia (COSBOA) held a roundtable on small business financing in June this year. I attended in my capacity as President of the Commercial Asset Finance Brokers Association (CAFBA). It is our members who are at the coal face of obtaining finance for small businesses.
Also in attendance were the Reserve Bank of Australia (RBA), illness the Australian Taxation Office (ATO), generic Treasury, the Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education (Dept. of Industry), the Australia Prudential Regulatory Authority (APRA), the Office of Small Business Commissioners and Academics from the University of Newcastle and the University of Western Sydney, amongst others.
Presentations were provided from University of Newcastle –Professor Scott Holmes;and from Treasury – Mr Ian Beckett; and from the Department of Industry – Ms Anne Scott; titled SME Finance: A Government Perspective.
In short, the round table was attended by many of the sectors of Government whose approach to any sector is invariably one of regulation.
Prior to the Global Financial Crisis (GFC) APRA had done an outstandingly good job in striking the balance between regulating and allowing financial markets to self regulate.
Australia’s regulatory regime ensured the worst effects of the GFC were not felt by the Australian economy. Further, APRA could quite rightly hold itself up to the rest of the world as providing an example of a balanced regime that allowed entrepreneurial spirit to blossom by ensuring there were adequate funds available for small business to borrow.
The worst excesses perpetrated in the financial markets in US and Europe were carried out in the derivatives market, often based on the residential lending or home loan market. The provision of excess credit into that market caused an enormous property bubble that burst with significant consequences not only for the individual borrowers but also for the banks that lent the money and ultimately the Governments that regulated the banks.
The essence of the problem then lay in the residential housing market.
Equipment finance did not cause the GFC. Lending to small business was not the cause of the GFC. It is therefore important that regulators recognise that tightening regulation inequipment finance, and small business lending, only serve to reduce the entrepreneurial character of many small businesses.
As Anshu Jain, Deutsche Bank AG Co-Chief Executive told the Economic Times earlier this year:
“Over the past five years, the banking industry has reformed itself and been reformed at an unprecedented pace. But now, in Europe, there’s a risk the pendulum may swing too far.”
He stated an overload of global regulation threatens to stifle Europe’s banking system and constrain economic growth.
“I am not questioning the importance or needs for governments to regulate banks or other large businesses” He said “But the cumulative impact of new rules may cripple the ability of banks to provide loans to the real economy”.
The Economics Times pointed out that in the aftermath of the 2009 G20 summit in Pittsburgh, which helped inspire a comprehensive re regulation of the banking sector, the supply of loans to the economy suffered in Germany. “Lending to German businesses by foreign banks fell by 30 per cent in the two years following the 2008-2009 financial crisis,” Jain said.
In a new white paper entitled ‘Banking regulations after the global financial crisis, good intentions and unintended evil’, Jean Dermine, Professor of Banking and Finance, says regulations may safeguard banks from future meltdowns, but the economy could suffer because the supply of loans would be severely curtailed.
In other words, the new banking regulations threaten to keep too much money in the vaults and not enough in the economy. “This is an overreaction,” Dermine told INSEAD Knowledge. “We should not forget that banks are extremely useful in the real economy, to finance lending to consumers and small and medium-sized companies. If you come up with stringent regulations, the cost of lending is going to go up tremendously. The cost of bank loans to small firms will increase”.
He went on to say: “Enforcing overly strict liquidity regulations will make it very expensive for banks to lend money. This severely restricts the role of banks which he believes is the wrong course of action”.
APRA specifies small business loans, whether or not extended to an individual, may be treated as retail exposures up to an amount of $1 million.
Now, for those of you with a couple of excavators, tipper and dog trailer combinations or even just the one 8-tonne crane, the $1 million limit is passed pretty easily.
Over that amount, APRA requires the bank to individually manage the loans with regular reviews of the financial position of the borrower and the setting aside of additional capital by that bank as provision against a possible future failure of the borrower.
In short, APRA requires banks to spend more time and more money making loans to customers who have in excess of $1 million in borrowings.
CAFBA’s position is that this amount should be increased to $5 million, which would in turn reduce the cost of lending to small business and ensure that banks made more capital available to this sector.
We do not want to see more regulation on a sector of lending that was not an issue before or after the GFC.