The Banking Royal Commission
Big bank bosses are to blame!
In the Burbs we call it Greed and Corruption. In the CBD banking head offices they call it growth.
The immoral, deceptive and self-serving behaviour of the banks has been laid bare for all to see in the last year or so. The Royal Commission has revealed just how corrupted the upper management of our banking system has become. There are too many examples to list but today I will attempt to explain what I think will be the eventual outcome. Sadly, it’s not pretty.
In summary, this is the biggest fraud ever inflicted on the Australian public and can be summarised as lending ridiculous amounts of money to people who could never afford to pay it back. This includes home loans, credit cards, equipment finance for cars and small business loans secured over residential property. And as a direct result, paying executive management teams outrageous, criminal and immoral amounts of money, commissions, bonuses and kick backs based on how much lending they could flog to the unsuspecting masses.
Let’s break it down a bit by using a fictional example of Sydney couple Barrack and Michelle.
- Let’s say in 2012, Barrack and Michelle make combined after tax income of $90,000. They have saved $50,000 for a deposit so let’s loan them $750,000 plus costs of another $50,000 to buy their first home using the first home buyers grant to top up the deposit. This loan is on top of the two car loans they have and the $8,000 they owe Harvey Norman for the furniture and big screen TV. Barrack and Michelle reckon they currently spend $70,000 in their budget with the remaining $20,000 in after tax income being available for debt reduction and interest. But the bank reckons they could live on $55,000 if they tried hard enough. So they replace the budget with the lower estimate to make sure the loan is approved based on their re-assessed bulls*#t capacity to repay the loan. That “assessed capacity” includes the extra $15,000 they saved with the stroke of a pen and never had any connection to reality.
- At this point the bank has said they can have the loan because instead of having only $20,000 for loan repayments they actually have $35,000. And then the bank goes above and beyond the call of duty. They offer Barrack and Michelle an interest only loan for the first five years in the house. Call it a house warming gift from us to you, heart shaped emoji. Now using my CBA loan calculator app the outcome is;
- Interest only repayments of $2788 per month or $33,456 per year for the first five years of the loan. This means the $20,000 real capacity and the extra $15,000 monopoly money are together enough to meet the repayments.
- The house purchase price was contracted at $800,000 but it really cost $850,000 with legals, stamp duty and a few sticks of furniture.
- Bingo!! Barrack and Michelle get their dream McMansion with double lockup garage and media room on a 600 square metre block in suburban Sydney. They say Sydney but it may as well be Birdsville they are that far out but hey, they’ve finally made it on to the “property ladder”. That magical, diamond and glitter encrusted ladder spruiked by real estate developers and brokers that brings wealth, jet skis, overseas holidays and happiness.
- The friendly and caring bank also makes sure their most important new customers are insured for Life, TPD and Income Protection. Because the bank is a caring and professional advisor and safe place for all things financial. This combined costs $400 per month or $4,800 per year for even the most basic cover. Note the bank aligned financial adviser will be paid up to 110% of this as an initial commission and a trailing commission each month for as long as the policy is in place.
- Barrack and Michelle struggle their butts off to meet the interest only repayments. They are offered $15,000 limit credit cards by their friendly banker and special free software to help them budget. Of course these extra sprinkles of fairy dust are only offered to the banks most valued clients. So Barrack and Michelle accept the credit card offers because they have now made it to the dizzy heights of “client” status in the bank. They are no longer a dirty old “customer”. They are really on the up and up now because with bank mantras like;
“Can” from the CBA
“More give, less take” from the NAB
“We live in your world” from the ANZ, and
“Australia, Proudly supported by Westpac”
Well how could they lose???
- Fast forward a couple of years and now we’re in about 2014 and after two years in the new house it has increased in value by 15% to $920,000. Barrack and Michelle, along with 500,000 urban Aussie’s are now lathering themselves in praise. Yeah they really picked the market when they bought the new house in Western Brownsville so they’ve decided to start a family. Their new found wealth, which they personally predicted, has enabled Michelle to take 9 months off work for the baby and all is well in the garden. It follows that their monthly net income falls from $7,500 to $4,000 so cashflow is tight and the baby is due any day now. So they contact their Executive Level Client Relationship Manager, Mr Donald. J. Dump and abrakadabra ! They are offered a second line of credit loan of $70,000 secured against the increase in equity in their home. Just like the credit card, this is just for while Michelle is not working, with the baby and all that. So now the family debt limit is $920,000 but very, very wisely the second loan is only there for emergencies. Mr Dump told them this was very wise and prudent management of the family finances and explained how common it was.
- Then surprise surprise, the income of $4,000 per month is only sufficient to cover basic living expenses and the interest only repayment on the original loan is not affordable. But wait, remember that’s what the second loan was for! Emergencies and this is clearly an emergency. So for the next 9 months Barrack and Michelle draw down on the $70,000 second loan to meet the repayments on the first loan. They also take the advice of their banker to pay off the maxed out $15,000 credit card because the interest rate on the secured loan is lower than credit card rates.
- So coming into Christmas 2016 the original loan of $850,000 remains unchanged. The second loan of $70,000 is now fully drawn but there’s $8,000 available on the credit card so Barrack and Michelle decide it’s time to expand their beautiful little family.
- In the meantime, Michelle had gone back to work part time and the baby (Malia) went to day care on those days. Barrack received a promotion and a pay rise to $80,000 net of tax which is great news. Then understandably, they decide that with the second baby on the way, Michelle will have to finish up at work. The second baby, Barrack Jnr, arrives and again all is well in the garden. The growing family needs a new car as neither Michelle’s Daewoo Lanos or Barrack’s aging Nissan Skyline can fit the kids. So they trade the Lanos for a $45,000 SUV. As you’d expect, the finance deal they got from Brownlands West Toyota was approved within fifteen minutes and wow, these guys are really doing well. There was a minor glitch as the Lanos only traded for $3,000 and the original car loan payout figure was $4,881 but hey, they had the credit card for that so all was well.
- It was mid 2018 before the cracks started to appear. When I say cracks, well it was more like the San Andreas Fault was opening up in Barrack and Michelle’s back yard. Because the young parents of two bouncing kids just received a letter from their newly appointed Senior Executive Partner Client Relationship Manager and Brownsville Team Leader Residential Lending, Ms Melania DuhBrain to advise that the interest only period on the first loan of $850,000 had expired and now it was converting to principal. Interest repayments of $4,800 were commencing in two weeks time. So now we have the tsunami of loan repayments as follows;
- $4,800 on the original $850,000 loan
- $370 on the $70,000 line of credit which is now fully drawn
- $870 on the SUV which was a five year deal
- $80 being the minimum monthly repayment on the credit card owing
- Grand total of $6,120 per month from total income, even with the payrise, of $6,666. BOOM !!
- 2018. So after a few months of fears, tears and mortgage arrears they arrange for a meeting with the newly appointed Senior Executive Partner Client Relationship Manager and Brownsville Team Leader Residential Lending. The plan is to get some advice on what can be done because Barrack and Michelle, in their own expert opinion, are now living in a house worth $1,200,000 as the market has continued to boom. It is now February 2019.
- 2019. When they meet with the smartly dressed Ms DuhBrain from the bank they are surprised at how young she is. But based on previous experience with the bank they are confident of a positive solution. Thankfully Ms DuhBrain has been well trained in how to polish a herd of financial problems and she tries to let Barrack and Michelle down gently. The final washup is;
- The house was worth $1,200,000 in about March 2018 but since then it has fallen about 10% to $980,000 so they are still ahead of the $800,000 they paid five years ago. Barrack’s genius as a real estate mogul remains secure.
- The bank has made some adjustments to their lending policy in West Brownsville and now only lend up to 80% of the value of the home which is now $784,000. With their secured debt now $920,000 they are “out of the money” or in other words “in deep sh#t”.
- To reflect the increased risk to the bank of having a customer (yes they’ve been relegated) owing more than the property value the bank has no option but to increase the interest rate along with bank policy.
- To help out with the challenges Melania gives Barrack and Michelle a business card for the Centrelink Financial Counselling Service. Thankfully, the CBA has an excellent relationship with Centrelink after the Rose Bay based CEO of the bank and the Minister for Poor People really hit it off over a few craft beers at a recent golf day.
- She also provides the business card for Silvio Peloris-Putin who is the most eminent and successful real estate broker in Brownsville should they wish to consider selling the house and starting their whole damned life over again.
- Then in a final sting for the bank, Melania tells Barrack and Michelle that they will need to take out Mortgage Insurance to cover the bank for the now highly likely possibility of them defaulting on their repayments.
So in the end you can see where this is all heading. Bank wins, customer loses. This story can be repeated many hundreds of thousands of times over across Australia and the Royal Commission has called them out on it. What happens now is up to politicians because the Royal Commission only makes recommendations for changes to policy and legislation. The Royal Commission does now implement the recommendations as that is up to Government.
Therefore……. What’s going to happen to you, your business and your lending arrangements? Here’s a few thoughts;
- Borrowing money just got a whole lot harder. Optimistic revenue and profit forecasts will no longer just be accepted by your business banker. Every line item will be scrutinised as the bank puts a whole lot more time into assessing the risk of the loan.
- So turnaround times for loan approvals will be much longer. Instead of application and approval in two to four weeks you should expect more like eight weeks.
- The conditions will be tougher and fancy words like “covenants” will play a more front and centre role in your lending relationship. For example, if the bank actually loans you any money they will insist on more frequent reviews of your trading figures. And, if your actual results fall below your forecast results by a certain margin then you will be sent to the naughty corner.
- Interest rates on business loans will increase as the banks seek to replace high volumes on loans with loans that deliver higher profits to the bank. That is; they will sell less loans but they will be individually more profitable.
- Recruitment into the banks will change substantially as they take steps towards building a more responsible culture. For example until now the best bankers were simply those who generated the most revenue for the bank. These big hitters were the overlords of the long lunch and lauded as the creative, thinking outside of the box type rocket boys. These guys (and most are men) specialised in making the figures fit the result. Through careful persuasion they enable or facilitated the preparation of dodgy figures from applicants to the bank that they knew would satisfy the credit departments “rigid” internal controls. So going forward your relationship manager will more of a plodder than a Gordon Gecko. They will be more likely to say no and they will check the information you submit for accuracy, reasonableness and substantiation. The remuneration systems within the banks will change away from bonus payments for high sales towards “something else”. Sadly that “something else” remains a mystery as even now the bosses are looking for ways to keep their heads in the trough.
- The banks will have to place tens of thousands of over borrowed customers into “care” or “remediation” or whatever else they want to call the problem children. Many debt laden families will recognise they are buggered and will hand their house keys to the bank. Their house will be sold and they will be bankrupt. They may not be formally declared bankrupt but what difference will that really make.
- The banks will become the Mortgagee’s in Possession of many thousands of homes and they will then endeavour to sell them over the next five to ten years. It will be slow as they will try to avoid dumping them all on the market at the same time to smash the market prices. This oversupply of homes for sale will keep downward pressure on housing for a decade.
- People will find other ways to live. Some will move in with the in-laws, others will leave the outrageous pricing centres of Sydney and Melbourne and look for work and new lives in regional towns where homes are cheaper.
- The real estate industry will become a slaughter house as the desperation for a sales commission becomes lava hot. Even the steady stream of Mortgagee in Possession sales won’t help because the banks will negotiate a much lower fixed price sales fee for the agents. Many real estate firms will simply close the doors and seek employment in other industries. Those agents that remain will put their energy into building their rent roll business after ignoring it for a decade while sales were easier to come by. My advice to anyone with a rent roll is to sell. They will be in serious demand as a replacement for lost sales commissions on apartments and over priced homes so take your chips off the table before the table catches on fire.
- Property developers will go bankrupt leaving unfinished apartment complexes across our cities. This is already happening by the way.
- Ten’s of thousands of tradies employed in construction will divert their efforts to the infrastructure constructions industry as the Government rolls out rescue packages bundled up as “Nation Building” programs.
- Regulators, safety people and engineers will get busy investigating poorly constructed buildings and try to figure out what to do with them. The developer is gone and has no money to fix the dodgy work and understandably, the banks won’t lend them a cent. You only have to watch 60 Minutes to get an example of the Opal disaster at Olympic Park in Sydney.
- Property spruikers will disappear into thin air as the appetite for investment properties dies. Those slippery buggers who reckon you can build a portfolio of twenty houses in three years and live a life of luxury will be found out as their clients fall into default on their loans.
This list can just go on and on and on. The Royal Commission has uncovered a banking industry so flawed and disgraceful that there will be rivers of blood on the carpet. Many CEO’s, Board Members and Executive types have already been moved on but there’s Vikings hoard of axes still to fall. Our previously trusted institutions will take a generation to restore a reasonable level of trust.
For any side of politics this will be tough going. The Labour side brought on the Royal Commission and look like they want to bash the banks by implementing the recommendations of the Royal Commission. They will bash too hard and lending will slow down into a recession. Maybe they’ll even roll out the old Paul Keating slogan of “it’s the recession we had to have”.
The Liberals are all at sea on this one and I just can’t see how they can polish such an awfully smelly t@*d. They can’t make a silk purse out of a sow’s ear and they know it. I’m calling the next federal election as being a complete white wash with Labour having a majority everywhere. The extreme left will then have too much influence and this will drive the economy into a long and painful downturn.
I could apologise for writing such a miserable diatribe. But I won’t because it’s already happened. The throats of lenders, developers, agents and customers have been cut in plain sight and there’s nowhere to hide.
For small business people my suggestions are as follows;
- Start taking business planning and financial forecasting seriously. Get out that old spreadsheet and put some honest work in to the revenue and expenses assumptions for the next year or two.
- Get your Accountant to play Devil’s Advocate on your plans and projections. Ask them to scrutinise your operations for any soft under belly before you see your bank. Be prepared. Know your enemy!!
- Make an appointment to meet with your banker to go through your business plans and financial estimates. Don’t wait for the bank to call you!! You need to take control of your business and rely on any banking credit risk assessment team to make your life easier.
- Make an appointment with another bank and present your case to them.
- Compare the two and then start negotiating. This is an excellent time for negotiating as the banks are under pressure like never before. They NEED to lend you money to make money for the bank so even with tougher lending rules they will be desperate for your business.
- Be nice to the business banker you meet with. Their jobs are uncertain and remember that most of the dodgy lending policies were developed by executives much higher up the ladder.
- Don’t wait.
That’s it from me for now.