We all know that feeling when you reach deep into the freezer and grab a mishappen lump of something from right down the back.
What will it be like when it thaws?
What is it?
Will it still be ok to use?
They are all good questions and Australia’s big banks are eventually going to find out the answer as an amazing $274 billion of frozen loans fester away right down the back of their vaults.
It is not a scenario that has any real parallels to recent experience with 1 in every 9 Australians having now frozen their mortgages as a result of the COVID-19 pandemic.
It comes after a very long period in which banks have reported falling numbers of bad loans, which are at record lows after the very long economic expansion.
With even the Reserve Bank now forecasting that the stage four lockdown in Melbourne will cause a bigger and more enduring spike in unemployment, the chances of that frozen lump all being safe for consumption when it thaws is becoming less likely.
Restarting loans swamped by further freezes
The omens are already looking poor, with $195 billion of the $274 billion being home loans and $55 billion being small business loans.
Of those home loans, just $18 billion resumed payments – or came out the freezer – by June 3 when the Australian Prudential Regulation Authority (APRA) figures were gathered.
But $40 billion of home loans then went into the freezer for the first time, meaning the mishappen lump of frozen loans is still getting bigger rather than smaller.
How many loans will emerge safely from the deep freeze?
The big question is what percentage of these loans will eventually get serious freezer burn – with repayments not able to be resumed due to unemployment or business collapse.
There is no real answer as yet but with the big repayment freeze now extended until January next year, a full picture will begin to emerge then.
One thing is for sure, the early signs are not encouraging with the Victoria stage three lockdown sure to add impetus to the loan freeze and few signs that the banks efforts to persuade their customers to restart repayment not bearing too much fruit as yet.
In May just $2 billion was thawed out by customers and that increased by $18 billion in June – still small compared to the $40 billion of new loans added to the freezer.
Regulators preparing for a rush of insolvencies and bad loans
One of the other ominous signs that the thawing process could be difficult is that regulators are readying themselves for a wave of trouble ahead.
APRA which compiled the figures has already been busy instructing banks to have extra capital on hand to meet any wave of business failures and loan defaults.
Similarly, the Australian Securities and Investments Commission (ASIC) is preparing for potential waves of small business insolvencies in 2021.
ASIC commissioner Sean Hughes recently told a parliamentary hearing that the regulator was in daily contact with banks and other lenders to understand how many borrowers could be in hardship.
“We are certainly looking out beyond the pandemic, and in particular to where the waves of potential insolvencies in small business sectors may emerge into 2021 and 2022,” Mr Hughes told the committee hearing.
“We’re very mindful of the impact not only families and small business, but also the impact on the insolvency profession and the volume of work that is going to be flowing in that direction. But it’s certainly something we will be keeping a very close eye on over the coming months and it’s fair to say years.”
The issue of thawing out the frozen loans is also being discussed by the Council of Financial Regulators — a body that also includes ASIC, APRA, the Reserve Bank and the federal Treasury.
APRA has now given banks temporary capital concessions for deferred loans until March next year, which would give banks time to work with customers and determine who could resume repayments.