Banks lend as fast as they can as margins and profits rise
It must be a strange time to be a banker.
There was a period after the Hayne Royal Commission when the very word “banker” became a shorthand for shonky and a whole slew of responsible lending regulations were about to come in to stamp out bad behavior.
Now, after a pandemic and a kind of loan strike after banks were forced to really ‘know’ their customers, these responsible lending laws are effectively out the window and the Reserve Bank and the Federal Government are urging banks to lend as there is. not tomorrow.
And they’re really serious, taking some of the risk and putting billions of dollars at minimal interest rates to make sure the banks get as much money out as possible.
Term Financing Facility Brings Billions to Banks
The best example is the Term Funding Facility to support lending to Australian businesses.
First, the banks secured $ 90 billion in financing at a three-year fixed rate of 0.25% (which was in line with the cash rate at the time) and it was available until the end of March 2021.
Then in September, the RBA gave them an additional $ 200 billion to lend for just 0.1%, with the offer open until June of this year.
It makes perfect sense for banks to lend this money as long as it is available, especially when they can lend for two or three years when they’ve only borrowed 0.1%.
JobKeeper continues for business loans
Another example is the current round of softened offers for SME loans, with roughly $ 37 billion of the $ 40 billion initially available from the federal government.
Loans are open to businesses that got JobKeeper in the March quarter, especially those struggling as a result of the pandemic.
Loans are now open to companies with revenues of up to $ 250 million, which is much higher than the original and less successful program which was capped at $ 50 million in revenues.
Keep the margin and don’t worry about the risk
The really attractive part of this latest offer for the banks is that the government bears a large part of the risk on these loans, guaranteeing 80% of the loan.
It is literally money for money for banks – the more money they can lend, the higher their margins and profits will be.
There is literally no way for the banks to lose on these loans.
If they go wrong, the taxpayer is blocked for 80% of the loss.
If the loans work – and they are likely to be quite strong given that many of these companies will be larger with turnover in the hundreds of millions – then the bank takes the lion’s share of the margin. .
This is a sort of ‘face I win, face I win too’ agreement, especially since the bank is allowed to charge up to 7.5% interest on commercial loans – a margin. considerable in any language.
Get the loans quickly
Remember, at the same time, the banks are full of money saved by households, with minimal deposit rates paid – regardless of the money that can be borrowed from the RBA.
All the bank really needs to do is encourage new and old customers to take out loans, keep the rates on the “hardest” loans higher, and hope for the best.
And with the economy recovering, consumer spending on the rise and significant household savings on the sidelines and ready to be redeployed, the risks of widespread loan degradation are steadily diminishing.
It’s a similar situation for home loans, given that the RBA has virtually guaranteed that interest rates will stay low for the first few years of the loan – usually when problems can arise.
And with fixed rate loans – the new black one from the bank – the loan term is only a few years so the risk is over a much shorter period.
One thing the Hayne Royal Commission showed us is that when banks have a chance to make money, they don’t care like a rash.
Oddly, both the RBA and the federal government are hopeful that these basic instincts remain largely intact, despite the deadly financial and reputation losses banks suffered during the Royal Commission.