Banks doing what they can in coronavirus crisis, but it’s delay, not forgiveness

Picture: Bloomberg

The extension of repayment deferrals to businesses with up to $10m in loan facilities has supersized the banking industry’s small business relief package, which dwarfs the 2008 systemic intervention to keep the pipeline open in wholesale funding markets.

The banks and their industry body, the Australian Banking Association, pulled the package together over the weekend, so that an extra 30,000 businesses can now defer repayments for up to six months.

The previous limit of $3m meant that extra cash was available to almost 400,000 small and medium-sized businesses with $150bn in loans.

About 425,000 SMEs with $250bn in loans are now covered, with the Australian Competition and Consumer Commission authorising the banks to act together.

ACCC approval was never going to be a problem.

The competition watchdog gave a green light to the weekend meetings, where anti-trust lawyers were almost as thick on the ground as bankers.

The numbers in the small business relief package are extraordinarily large.

To put them in some kind of context, the guarantee scheme for large deposits and wholesale funding implemented by the Rudd government enabled the industry to raise $150bn in funding backed by a state guarantee.

Of course, there’s no direct comparison between the two packages as they were designed for different purposes.

By the time the GFC was over, the banks had lined Treasury’s coffers with $5bn in fees to access the guarantee.

On this occasion, bond buying by the Reserve Bank, or quantitative easing, is designed to keep interest rates low and preserve access to competitive funding.

The banks will also capitalise the interest foregone on any deferred repayments, and they’ll happily bask in the five minutes of reputational sunshine that comes their way.

However, senior bankers are under no illusions - there’s a freight train coming right at them in six to 12 months when conditions start to normalise.

Through no fault of their owners or managers, a huge number of businesses are going to fail as a result of a health crisis.

Skyrocketing unemployment is also going to mean that people lose their houses.

The blowback on the banks will be something to behold, and any forbearance they displayed in the first half of 2020 will be well and truly forgotten.

ANZ Bank chief executive Shayne Elliott got a taste of it on ABC Radio last week when he was taken to task by a talkback caller over persistently high credit card interest rates.

Elliott agreed that the banks would make “life or death decisions every hour of the day” for business customers, and the same applied to households.

“But we can’t oversimplify this and say the banks can save everyone,” he said.

“We don’t have endless resources either.

“We have highly leveraged balance sheets because of the nature of what we do, and we have depositors to look after too.

“So we have masses of capacity, but it’s not limitless.”

It was a small taste of what’s to come, as is the reaction to the “revelation” that the industry’s hardship packages are all about repayment deferrals; not forgiveness.

“Aha!” some borrowers say, believing that capitalising deferred interest repayments is a window into the industry’s true intention to profit from the pandemic.

It will be someone’s job to explain that widespread debt forgiveness would introduce an unprecedented level of moral hazard into the banking system.

One banker said the GFC prompted a realisation that it wasn’t such a bad thing to have four large and stable banks.

“But after that there was about 10 years of pain,” he said.

“If history’s any guide, the same thing is going to happen.”