Paul Keating warns that banks’ lending salad days are over

The “salad days” for lending are ending, with banks facing tighter regulatory controls, former PM Paul Keating warns.

Former Prime Minister Paul Keating in Sydney yesterday. Picture: AAP

The “salad days” for lending were ending, with banks facing tighter regulatory controls and the housing boom over, former prime minister Paul Keating warned at a conference in Sydney yesterday.

Mr Keating said the banks were facing tighter controls as a result of the Basel rules on capital adequacy, while financial regulators had had a “gutful” of them. This was likely to lead to changes that would restrict the banks’ ability to lend.

“The housing boom is really over,” he said.

“APRA (the Australian Prudential Regulation Authority) has said ‘no more of these interest-only loans’.

“The salad days of bank lending are passing, so the banks have to get a bit smarter.”

Mr Keating said the royal commission into misconduct in the banking and financial services sector would also “make life harder” for the banks.

He said the commission could see employees give evidence under oath about what was really going on inside banks.

“They have regulators all over them,” he said of the banks.

He said banks did not really want to lend to business these days and would “rather just do housing loans”.

Mr Keating said there had been “misincentives” within the big banks to grow their business by writing new mortgages, including having a high proportion of interest-only lending.

He said there needed to be a “regime in place that keeps the quality of lending up” and also ensured good relations between banks and borrowers.

Mr Keating said the US financial crisis of 2008 and 2009 had shown the dangers of poor-quality lending in the housing market.

“I am little surprised that the banks (in Australia) have been found wanting in these respects,” he said.

Mr Keating also warned that borrowing for property investing by self-managed superannuation funds was an “accident down the road”.

“Superannuation funds being allowed to borrow and get in debt is very bad,” he said.

“It should never have happened. I have always been opposed to it and it is an accident down the road, for certain.”

Mr Keating, who was instrumental in the founding of Australia’s $2.5 trillion compulsory superannuation system, was speaking as figures from the Australian Taxation Office showed that borrowing by SMSFs for property had ballooned from $2.5 billion in 2012 to $25bn this year.

ATO figures show that almost one in 10 self-managed super funds had access to limited recourse borrowing arrangements which are mostly used to buy property.

Mr Keating said the problem with individuals running self-managed super funds was that they did not have the “smorgasbord of assets to choose from” that large super funds did.

“If you are running a self-managed super fund you have to back yourself as a stock picker,” he said.

He quoted US billionaire Warren Buffett’s comments that most people who did not have expertise in investing would be better off putting their money in index funds such as those offered by Vanguard than trying to pick stocks.

He said Vanguard, which managed some $US6 trillion in assets around the world, only charged about five basis points in fees.

Mr Keating said the banks and the big super funds should look at developing a closer partnership that could see more lending to private companies.

He said the assets of the super industry were about to exceed the assets of the banking system.

Banks and the big super funds should get together to allow for more lending to private companies. “There’s a chance for a structural change,” he said.

Mr Keating said having banks and super funds working together to lend to Australian business was an opportunity for both sides to invest in “alternative assets”.

Former NSW premier Mike Baird, who is now a senior executive with National Australia Bank, said the banks were closely watching the royal commission.

He said the commission was not a “tick the box examination” of the banking and financial system, but one that would bring about change in the industry.

Mr Baird said he wanted his executives to follow the proceedings closely so they could see what happened when mistakes were made.

“That’s how you will get cultural change,” he said.

“We need to make sure that these things never happen again.”

Mr Baird said the potential for lending to companies from co-operation between the banks and the big super funds was now being explored by both sides.

Mr Baird told The Australian that NAB had been talking to a group of about five major super funds that had the capacity to lend $260m to companies in deals that would be arranged by NAB.

He said there was now interest by some big super funds in this type of lending in co-operation with banks, using the credit rating expertise of the banks.

“If you had tried to do this three years ago you might have got $20 million,” he said.

“But there is now an exponential interest.”

He said NAB had already been involved in some lending deals involving companies such as Brickworks and data centre company NextDC.

He said the big super funds were looking for long term investments while the banks were limited to five-year lending.

“It has the advantage from our point of view that we don’t have to put all our capital with the one client and put it into other things,” Mr Baird said.

“We are charging down this space.

“In the last two months I would have had 30 discussions with clients about super funds playing a role in their debt longer term.”