Banking royal commission: CBA loan default theories dismissed

The bank inquiry rejects activists’ theories CBA had ‘ulterior motives’ to put people into loan default after Bankwest takeover.

The financial services royal commission has dismissed theories the Commonwealth Bank had “ulterior motives” to put people into loan default following its takeover of Bankwest during the global financial crisis.

Counsel assisting the commission, Michael Hodge, QC, said that behind the scenes the commission had done a great deal of work examining whether there was any truth to the allegation.

However the commission will examine whether the way CBA treated borrowers following the takeover was unfair, unconscionable or fell below community standards.

The decision will upset activists who have long maintained the CBA deliberately pushed people into default for its own financial benefit.

CBA’s takeover of Bankwest is one of the case studies to be examined in this fortnight of public hearings, which focuses on lending to small business.

Laws and codes of conduct are also to be examined, forcing the Australian Banking Association to release a draft of its proposed new code of conduct this morning.

Mr Hodge said the ABA had been a “notable opponent” of extending unfair contract term provisions because it could have an effect on compliance costs and have flow-on effects for access to credit. The provisions were nonetheless extended.

The small business and family enterprise ombudsman has recommended strengthening the ABA’s plan of measures to ensure members meet community expectations.

Mr Hodge spent considerable time this morning explaining why the commission did not regard “ulterior motive” theories about CBA’s treatment of Bankwest customers as credible.

“There are various ulterior motive theories and they are not consistent with each other,” he said.

“Outside of these hearings significant work has been done by the commission” on the ulterior motive theories “and the extent to which there is evidence to support them,” he said.

He said that as a result of this, and in consultation with commissioner Kenneth Hayne, the commission had decided not to run case studies dealing with the ulterior motive theories during public hearings.

Mr Hodge said there were two main ulterior motive theories.

The first involved how much CBA would have to pay Bankwest’s owner, HBOS, to take over the business.

HBOS agreed to sell Bankwest to CBA in late 2008 as it was being bailed out by the UK taxpayer after being smashed by the global financial crisis.

People suddenly foreclosed on by the new owner, CBA, have theorised the bank put their loans into default in order to use price adjustment or clawback provisions in the sale agreement to reduce the $2.1bn it had to pay HBOS.

However, Mr Hodge said most of the loans the commission had examined were in trouble, with receivers appointed, bankruptcy proceedings underway or failures to pay, before the adjustment or clawback dates.

“In any view these were already distressed loans,” he said.

A second theory involved CBA writing off loans to reduce its need for regulatory capital.

However, this was based on misconceptions, Mr Hodge said.

Impairing and provisioning a loan does not improve a bank’s tier 1 capital ratio — rather it reduces this ratio, he said.

He said the use of the two theories also revealed an unhelpful “bias” when trying to work out what banks should do when confronted with poorly performing loans.