Frontline fear in banks’ branches is bad for all of us

What used to be quick, routine decisions are tying bankers in knots, helping send house prices downwards.

Bank staff are fearful of falling foul of regulators Picture: Adam Yip

Treasurer Josh Frydenberg is urging bank chief executives to ease up on their credit squeeze with an emphasis on granting extra loans for small business.

He is whistling into the wind.

The credit squeeze juggernaut is being driven by the regulators, led by APRA. Bank chief executives and boards have greatly reduced power.

To understand this, the Treasurer need to go down to his local bank branch —-as I have done — find a quiet moment and talk to the people that work there.

Rightly or wrongly, people are scared by what they describe in low tones as the APRA ”Gestapo”.

The description maybe unfair, because fear often exaggerates. But there is no doubt that APRA is the main force behind the credit squeeze. Unless much clearer boundaries are drawn, APRA, aided by the royal commission, will drive Australian house prices lower and lower and construction rates will fall.

Many will say, with justification, that dwelling price falls are a good thing.

But we all need to understand that if they keep falling, it will cause a severe contraction in the economy. And while, in public, Josh Frydenberg is calling for banks to lend more, he is giving APRA another $60 million, in part to hound bank officials to make the credit squeeze worse.

And so bank officials now need to make sure that every detail on every loan application is right. I think that banks were much too lax in past home lending and proper assessment of credit is important for the banking system.

But the pendulum is swinging too far the other way.

In routine matters — not first home loans — what would have been a three or four minutes routine decision by any worthwhile banker is now a time consuming task that bankers and customers view with apprehension.

If the bankers know you well they will confess their inner fear: “What if APRA checks the document and it’s wrong? I might lose my job”.

And if a loan is approved and that loan that turns bad and the borrower loses money then it’s possible the bank will be accused of irresponsible lending. Again the banker who arranged the loan maybe be shown the door.

Remember this is a fear at branch level. The instruction might come down from bank management in their office towers that it’s OK to lend, but it’s a game of survival, because the branch people know that those executives who give such instructions, including the CEO, might be shown the door by the APRA “Gestapo”.

It’s true NAB is undertaking a cash flow based lending scheme for small enterprises.

But it’s a rare initiative. NAB’s scheme has great potential but in the current environment it won’t change the game. While the squeeze on small business loans is hard to document, in dwellings we get a weekly report via the auction clearance rates.

It’s no surprise that Melbourne and Sydney clearances are falling in most weeks. In Sydney clearance rates are now at unprecedented low levels.

In simple terms not enough buyers can borrow sufficient money from the banks to pay the prices that the vendors are asking. But each fall in the clearances and the associated lower dwelling prices makes bankers more nervous and they quietly lower the amount they will lend. It’s not dramatic but each time they tighten the screw, prices of dwellings edge lower. It’s a slow but deadly vicious downward spiral. But don’t worry. APRA’s good friend, the Reserve Bank, says the economy is fine and it’s full steam ahead.

Westpac economist Bill Evans has been around a long, long time and, like me, has seen credit squeezes before. Bill fully understands their power and the dangers we face when combining a credit squeeze with political turmoil. He uses diplomatic words but in effect he is now saying the Reserve Bank has it all wrong and is underestimating the dangers.

It looks to me that Josh Frydenberg may be getting a similar smell from the world outside Martin Place.

My fear is that on top of the APRA squeeze, we will have royal commission recommendations and then a series of class action court cases against banks. Combined, they will deepen and extend the credit squeeze. If the vicious downward spiral was broken today then there would be minimal damage. But the squeeze looks like not only continuing but getting worse. If that happens fasten your safety belts for a nasty downturn.