The Royal Commission inquiry into financial misconduct blew up throughout 2018, serving as a warning to Australian banking bosses who may have thought that they could get away with reckless lending behavior. It already appears that this could all catch up with the market in 2019.
Now that most of the inquiry’s revelations are out in the open and the final report is due sometime next month, there are already fears that the entire issue could precipitate a new credit crunch.
This is partly because the lending culture that was a part of all the big banks in the last few years is nearly gone, and the net has tightened a great deal. Banks are giving out less risky loans, and while this is good for the longer term, as there will be fewer individuals and businesses defaulting, those expecting liquidity may no longer be able to get it.
In the short term, this poses new problems. A lack of disposable income for citizens means less spending, and for businesses, a lack of available capital lending power means that they may not be able to grow.
Several business leaders are now voicing their concerns that a credit crunch of sorts is on the horizon. They believe that unless the banking system embraces a new culture to encourage lending while tracking credit statuses more effectively, the squeeze will become a big problem before too long.
The housing market is already falling in Australia, although most of this was due to a market correction before now. Homes are no longer the asset that they once were, and the push on disposable income means that spending power reduces.
Business leaders attending the prominent Couta Boat Race sponsored by KPMG have been discussing a ‘heightened risk alert’ for Australia as they try and find solutions to encourage more lending and stimulate the market.
David Crawford, Chairman of mining company South32, noted that ‘many of the major corporates are generators of significant wealth for the country, but if they are unable to get financing, then that’s going to adversely impact.’
This is likely to pose a threat to the growth of the Australian economy if it is allowed to continue. Ahmed Farhour, former CEO of National Australia Bank and current CEO at Latitude Financial Service, said that there has to be an impetus to help lending progress.
Farhour discussed ‘the unintended consequences of the Royal Commission’ and the inherent risk of the four major banks starting to contract. He added that if they do, then ‘this is going to have very serious consequences.’ Farhour also pointed out that the banks ‘are not expanding as fast as the economy needs them to expand.’
This puts the growth of the banks at odds with the needs of Australia in terms of growth forecasts and signals that a recession could well be on the way. Without the implementation of measures to counteract a downturn, including interference from the central bank to stoke growth through changes to interest and cash rates, the current situation is unlikely to resolve.
Treasurer Josh Frydenberg has criticized the banks this week for shying away from lending, saying that they are posing economic risks.