Australian banks will follow their US counterparts in lifting loan loss provisions, but the magnitude is, so far, smaller due in part to different loans books and the COVID-19 impact on the economy.
The macro effect of the pandemic hasn’t featured in parliamentary scrutiny of ASIC which is more focused on individual scams and political issues around industry superannuation funds, along with ALP concerns about regulation of class action funders.
ASIC chair James Shipton told the Joint Parliamentary Committee hearings that financial misconduct complaints had increased 20 per cent since the pandemic hit earlier this year.
They centred on fake investment schemes, fake cryptocurrency products and romance site financial scams.
As expected the political inquiries were centred around individual financial issues and suggestions ASIC has gone soft on industry funds.
ASIC was taken to task for its suggestion that the cost of running a self managed super fund can run as high as $13,900 a year when later ATO figures put the total at more like $1300 - the argument being ASIC raised concerns about self managed funds in an attempt to scare people into putting their money instead with industry funds.
A long bow, but it was a persistent theme of the questions on Wednesday.
ASIC has explained the different figures as being a definitional issue and its advice was based on the theme that self managed funds cost money, so only those with a certain level of funds should play on the field.
Bad loan provisions
On the macro front overnight JPMorgan, Citi and Wells Fargo lifted bad loan provisions to a combined $US28bn ($40bn) lifting total provisions to more than 2 per cent.
This was expected to be a theme for questions, with concerns over the impact of loan deferrals by the big banks.
The issue being if the loans are deferred and people genuinely can’t pay the interest costs, then maybe the loans should be reclassified as dud loans.
This would add costs to the banks and also present a national economic problem because small businesses and consumers will have too much debt.
Judo’s Joseph Healy has argued the government should look at schemes like those being considered in the UK where small business debt could be converted into equity in a fund backed by the federal government.
The issue is important because the deferral of loans now until the year’s end might create a new cliff for the economy.
Judo has around $2bn in loans outstanding compared with the big four banks, which would have small business loans about 50 times bigger.
The argument being the bigger balance sheets of the big banks is itself a safety valve.
Securitise home loans
US banks tend to securitise their home loans which means their balance sheets are more exposed to credit card and car loan debts among others which tend to be more vulnerable.
Australian banks like home loans because they earn about 20 per cent on the loans secured against property compared with small business loans, which are close to breakeven levels.
Contrary to expectations heading into Wednesday’s parliamentary hearings, the bank loan issues and their impact on the economy were not of major interest.
ASIC has told the banks they should be dealing with borrowers to ensure they understand the costs of loan deferrals and are open to classifying the debt correctly for the benefit of their shareholders.
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