The issue of whether there is a sufficient supply of credit to borrowers has taken on a particular relevance today with the introduction of a bill to federal parliament paving the way for the creation of the Australian Business Investment Partnership, or the "RuddBank" as it has been dubbed.
The ABIP – which will manage $4 billion of initial funding, with half provided by the government and half by the four majors – is being established with the primary objective of supplying loans to viable commercial property assets in Australia where funding isn’t available from commercial lenders.
The concept of ABIP was a response to the concern that foreign lenders and other lenders would stop funding Australian property, which tends to be leveraged as a result of the financial crisis, and that the local banks might not be able to fill in the gaps. The majors face both sectoral concentration limits and individual exposure limits to their lending that could prevent them from increasing their funding to otherwise viable borrowers.
The interesting aspect of the bill is that it doesn’t confine the RuddBank’s lending to commercial property. It has a "further objective". It can provide funding for other areas of commercial lending if, according to the explanatory memorandum for the bill, "circumstances necessitate" and provided the arrangements are unanimously agreed by ABIP’s members – the four majors and the government.
While the initial funding for ABIP is only $4 billion, it will have the ability to issue government-guaranteed debt of up to $26 billion, so it would have significant capacity to fill in any gaps that open up in the banking system as a consequence of the withdrawal of the 30 per cent of the system that has been held by institutions other than the majors.
It was always peculiar that the vehicle was being targeted so narrowly at property, although traditionally it is property that is not only most vulnerable to a financial crisis but tends to do most damage to the banking system.
Providing some kind of floor under it to prevent a desertion of lenders from undermining the market will also help avoid the kind of trauma that occurred when commercial property markets collapsed in the early 1990s.
The ABIP won’t, however, stop the normal market cycles from operating – it will only lend against assets and income streams that are deemed viable, with the government having an effective veto on any loan and, indeed, all lending decisions needing to be unanimous. The new institutions won’t be able to lend outside Australia, or fund land banks, speculative development or rural properties.
Nor will the fund be used to acquire poor quality loans from the majors. Any major with an exposure to a prospective ABIP borrower will have to at least maintain their pre-existing share of the funding.
ABIP will, as it generates, create provisions for loss. That, and the $4 million of actual equity the partners are contributing, would bear the initial weight of any losses. Then the rest of the initial funding would be at risk.
If ABIP issues government-guaranteed debt, however, to avoid the banks’ entire $2 billion of funding being treated as equity by the Australian Prudential Regulation Authority and deducted from their capital bases, reducing their ability to lend in their own right, up to 5 per cent of the debt will be subordinated to the initial $4 billion of funding and would therefore be the tranche of material funding that would be most risk. The government will receive "an appropriate" return for the subordination.
It may be that the RuddBank never makes a loan. It could be that demand for credit slows sufficiently that the majors, all of whom are well-capitalised, can meet it. The foreign banks might not rush for the exit and funding conditions might improve for the regionals and non-banks.
It is more than likely, however, given the majors’ existing exposures to commercial property and their past experiences, that they will be constrained and feel constrained from doing anything but maintaining their levels of exposure to the sector. There will inevitably be other corners of the economy where the re-financing demands are beyond their capacity or their willingness to increase their exposures.
It is also likely, given the politics of using taxpayer capital to lend to foreigners, that the nationalised banks will withdraw significantly from offshore markets or at least the higher-risk segments in them.
Thus, the RuddBank is a contingent lender, available and ready to go in an emergency. It would be a good thing for the economy and system if it weren’t called upon to lend. It is an equally good thing that it is being put in place before that moment has arisen.
~Dis
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