Tight as a drum

First it was the global financial crisis. Then it was the uncertain economy. Now the big banks are fingering global banking rules as the reason they are favouring home loans over small business loans.

A decade ago, for every $1 the banks lent to home buyers they loaned another to a business owner. Now the ratio is $1 of home lending to just 60¢ of business lending.

National Australia Bank business banking group executive Joseph Healy says the Basel Committee on Banking Supervision is responsible for much of this anti-business bias.

“[We] have a system that makes it more attractive for banks to lend the marginal dollar on a weekend holiday home than to a small business,” he says.

The Swiss-based Basel Committee of central bankers sets the rules the world’s banks live by. The first version of these rules, known as Basel I, forced lenders to set aside twice as much capital for each business loan as for a home loan.

Professor Michael Skully of Monash University says that under a second version, Basel II, this increased to three times and is even higher for banks with high credit ratings such as NAB, Commonwealth Bank of Australia, Westpac Banking Corp and Australia and New Zealand Banking Group.

For the big four banks, money set aside in case a business sours is money they cannot lend to someone else at a profit. “It is just simply more costly for banks to lend to businesses than to personal customers,” Healy says.

“As a guide, every 1 per cent of capital requirement represents an approximate 10 basis points cost to margins. So, under Basel II, residential mortgages require, on average, 20 basis points of margin to fund capital costs, versus about 80 basis points for business lending.” Skully warns that Basel III, released in July, will only increase the bias. “The suggested revisions to Basel II will require more capital holdings or more expensive capital holdings and so make banks even more concerned over risk weights,” he says.

For their part, CBA and Westpac refuse to comment on the bias. ANZ denies it: “[We’re] not choosing between providing one kind of lending or another,” says business banking general manager Jeremy Dean.

Banking analyst Martin North says that while local regulators could “tweak” the application of the Basel III rules, this would put the major banks out of synch with other countries.

“The only lever I can see is price, meaning that if commercial lending is sufficiently profitable, banks will choose to lend to them,” North says.

But banks have already raised the price of small business loans. According to a report by JPMorgan and Fujitsu Australia, the average interest rate on a small business loan is now 4 percentage points higher than the bank bill swap rate, compared with 2 percentage points before the global financial crisis. The average home loan rate, meanwhile, is 2.8 percentage points above the benchmark rate, against 1.8 percentage points in mid-2008.

Yet small businesses are still being starved of bank funding. Why? The banks’ answer is there is less credit available, reflecting the caution shown by foreign institutions that fill the gap between what we save and borrow.

Their critics’ say the big banks monopolise the available credit and use it to restrict lending to the most profitable borrowers. Invariably, these are home buyers. Competition is as weak in home lending as in business lending but home loans cost less to write and monitor.

“Banks have insufficient capital to do as much lending as they would like,” North says. “They will select the higher margin lines.”

The Australia Institute research fellow David Richardson says making it easier for customers to move between banks and other measures to support smaller banks and credit unions will not be enough to loosen the big banks’ grip.

“The lesson of our history seems to be that competition policy is not a very effective instrument against a large, powerful industry enjoying the competitive advantages resulting from economies of scale,” he says.

Richardson suggests breaking up the big banks and “influencing banks to keep lending rates to a constant mark-up relative to official interest rates”.

While it is unclear whether the federal government has a stomach for such radicalism, one thing is clear: the financial system’s neglect of small businesses starts in Melbourne and Sydney, not in Switzerland.

BRW

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