It must be a strange time to be a banker.
There was a period post Hayne Royal Commission when the very word ‘‘banker’’ became a shorthand for shonky and a whole raft of responsible lending regulations were about to arrive to stamp out bad behaviour.
Now, after a pandemic and something of a lending strike after the banks were forced to really “know’’ their customers, those responsible lending laws are effectively out the window and the Reserve Bank and Federal Government are urging the banks to lend like there is no tomorrow.
And they are really serious, wearing a chunk of the risk and putting up billions of dollars at tiny interest rates to make sure the banks shovel as much money out the door as possible.
Term funding facility is shovelling billions to the banks
The best example is the Term Funding Facility to support lending to Australian businesses.
Firstly, the banks got $90 billion of funding at a fixed three-year rate of 0.25% (which was in line with the then cash rate) and it was available until the end of March 2021.
Then in September, the RBA gave them another $200 billion to lend out for just 0.1%, with the offer open until June this year.
It just makes sense for the banks to lend this money out while it is available, particularly when they can lend out for two to three years when they have borrowed at just 0.1%.
JobKeeper keeps on going for business loans
Another example is the current round of sweetened offers for SME lending, with around $37 billion of an original $40 billion available from the Federal Government.
The loans are open to those businesses that were getting JobKeeper through the March quarter, particularly those that are struggling in the wake of the pandemic.
The loans are now open for businesses with turnover up to $250 million – much higher than the original and less successful scheme which was capped at turnover of $50 million.
Keep the margin and don’t worry about the risk
The really attractive part of this latest offer for banks is that the government is wearing much of the risk on these loans, guaranteeing 80% of the loan.
This is literally money for old rope for the banks – the more of this money they can lend out, the more their margins and profits will be boosted.
There is literally no way the banks can lose on these loans.
If they go bad, the taxpayer is stuck for 80% of the loss.
If the loans perform – and they are likely to be fairly sound given that many of these businesses will be larger with turnovers in the hundreds of millions – then the bank scoops up the lion’s share of the margin.
It is a “tails I win, heads I win as well’’ sort of deal, particularly as the bank is allowed to charge up to 7.5% interest on the business loans – a hefty margin in anyone’s language.
Get the loans out the door fast
Remember, at the same time, the banks are awash with money being saved by households, with tiny deposit rates being paid – quite apart from the cash that can be borrowed from the RBA.
All the bank really needs to do is encourage customers old and new to take out the loans, keep the rates higher on the “dodgier” loans and hope for the best.
And with the economy recovering, consumer spending on the rise and significant household savings on the sidelines ready to be redeployed, the risks of loans going bad in a widespread way are shrinking all of the time.
It is a similar situation for home lending, given that the RBA has virtually guaranteed that interest rates will stay low in the early years of the loan – usually the time when trouble can strike.
And with fixed loans – the new black in banking – the loan period is only for a few years so the risk is over a much shorter period.
One thing the Hayne Royal Commission showed us was that when the banks have an opportunity to make money, they are all over it like a rash.
Bizarrely, the RBA and the Federal Government will both be hoping that these base instincts remain largely intact, despite the bruising financial and reputational losses the banks endured during the Royal Commission.