Are banks all that bad?

5th May 2020 | Ben Pauley


I don’t think this one is going to win me a lot of votes but whilst scrolling through my linked in feed and through the herald over the last few days I feel compelled to write this.

Banks have caught a lot of flack lately, particularly around the government Business Finance Guarantee Scheme (or BFG for short). Whilst I think there is deserved criticism of our nations largest lenders, I am not always certain they deserve the full weight of what is laid at their doorstep and certainly in this instance I think some of this is overboard.

Many, including Grant Robertson, have found time over the last week to criticise the banks response to this unforeseen and unprecedented crisis. Last week Grant Robertson was quoted as saying ‘it has become clear that the support that is available to our small and medium businesses from banks is not meeting their needs, nor our expectations as a government’. I have heard many others complaining that the banks have not just opened their cheque books and asked ‘how many zeroes?’.

There has been a lot of talk around the fact that the government was guaranteeing loans under the BFG scheme up to 80%. What hasn’t been spoken often about is the fact they intended to audit all the loans the banks put in place, there were strict criteria for the lending to qualify and the banks were expected to lend only to solvent businesses. Banks when assessing a deal look at two key factors. One is the risk of loss, this is how much the banks is likely to lose in the event a client defaults. The government largely took care of this with the guarantee limiting the possible losses to 20%. The second however is a risk of default, how likely it is that the client will be able to pay their obligations. Banks therefore hold a responsibility, rightly so, to lend only into businesses they genuinely felt were both able to repay the loans and had also taken steps outside of borrowing to ensure they were viable during this time.

This ensures that a bank can retain a consistent and ongoing ability to lend money into the market. If the purse strings are loosened too much we will see a constant boom and bust of the system where the bank is either all in or sitting on the sidelines.

Where has the discussion been around the fact that as a nation we were clamouring for support little more than 1 week into lockdown. By April 7th, 40% of NZ’s workforce (a little of 1.073m people) were having their wages supported by the Wage Subsidy Scheme. By April 20th some $31bn of home loans were either on full Loan Holidays or had switched to interest only schemes (about 50/50) with a further $5.5bn of loan holidays granted to businesses. Those numbers are undoubtedly higher now.

There is a great expectation of the banks ‘social responsibility’ and a general rhetoric that they should be bailing out struggling businesses and individuals at their cost. This is despite the banks being publicly listed entities with a responsibility to their shareholders and completely ignoring their social responsibility to not exacerbate the problem. The above figures for loan holidays do point to a huge level of support for the public, but we have to be careful not to take this too far.

What I would prefer to see is a robust banking system that is able and willing to support the nation in its recovery rather than spending a huge amount of time trying to unwind positions taken to prevent a recession that was and is inevitable. Let’s not forget that there was a clamour for restrictions on bank policy to prevent a housing bubble, ensure ‘responsible lending’ and shore up our banks balance sheets. All of this was pre-Covid 19 and all was designed to reduce the risk positions of New Zealands Banks. We now expect them to throw caution to the wind?

The Government has now recently launched it’s own lending scheme in response. This comprises an initial loan of $10,000.00 with a further $1,800.00 provided per employee up to a maximum of $100,000.00. The eligibility criteria are the same as the wage subsidy scheme, merely declare that it is a viable business, that you will use the money for core business operating costs and enter into a legally binding contract. This loan is interest free if repaid over 12 months and will be priced at 3% if paid later with a maximum term of 5 years and no repayments required for 2 years.

I honestly struggle to understand how this is a good idea. This seems ripe for people to take advantage of at the taxpayers (you and I) expense. There seems little control on the distribution of funds and if the Government plans to enforce defaults on the loans there are going to be many who bail out on this. I wouldn’t at all be surprised to see this taken up in much the same veracity as the Wage Subsidy Scheme with many businesses who perhaps don’t need the funds even just parking them on deposit / against bank debt for 12 months to enjoy the advantage. Remember that the National debt is OUR debt as taxpayers – this is paid for by our taxes.

I, and I don’t think anyone, knows what the right response to Covid 19 was and is. What we do know is that as a result of the response, and the virus, we are now facing a recession (globally) that will include job losses, business failures and bankruptcy’s. Some of this will be fast tracking what was perhaps inevitable, some of it will truly be bad luck, all of it will be temporary. The global economy moves in cycles and as sure as we are entering into and in a downturn we will have a boom again in the future.

Let’s not ignore Moral Hazard. Let’s not try to avoid the inevitable but rather embrace it and look to work through it. Let’s not burden the next generation with obligations from our time but rather get the nation ready to move forward again. We will be better off in the long run for doing so.

Pete and I are fortunate as we established our business with sufficient cash reserves to see out 6+ months, we can ride out the storm whilst not everyone can. A lot of the above is contentious and not an easy pill to swallow. As I mentioned at the top of this blog, I don’t think I will win many votes for this, however, I also think it is a side of the story that needs to be said.

Despite the above, there are many options to borrow and get going, to move forward and to see yourself through. If you are looking for good advice on not just how to survive the next 6 months but to thrive in the future get in touch with us today. We would love to help.

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