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Banks are bleeding as they take a bullet for the economy

It is fair to say that even the banks would struggle to quantify the profit impact given the unknown duration and the impact of large numbers of small and medium-sized businesses moving to mothball mode in response to the necessary but draconian public health measures issued by the government.

Banks will almost certainly forfeit those “unquestionably strong” capital levels that regulators had imposed in 2017. That will be necessary. They were put in place for a rainy day – and thanks to the coronavirus-induced crisis it’s now pouring.

Banks whose central operating tenet has always been the management of risk are now being prevailed upon to alter that mindset.

The Australian Prudential Regulation Authority (APRA) came to the party last week by allowing lenders to eat into some of the big capital buffers.

But sacrifices had to be made by large and small banks which are now working as a team with the government and regulators in order to save the Australian economy from worse than a recession.

The alternative is the destruction of small business – which would in turn ensure there would long-lasting damage to the economy – forget the V or the U shaped recovery. It would be L shaped and long-lasting.

Meanwhile there is little point in reading too much into National Australia Bank’s move to strengthen its balance sheet by converting $750 million of hybrid debt into shares is a quick and simple means of raising money and bolstering tier one equity.

It announced this move back in February before the real crisis was really upon us – it was part of new chief executive Ross McEwan’s attempt to improve NAB’s CET 1 levels which had long lagged those of its competitors.

Since then Australia has changed beyond recognition. The financial virus has moved faster than the coronavirus. NAB summed it up in a statement on Monday – one that may prove to be a major understatement. “Should the impact of the virus be severe or prolonged it is expected to have a material or adverse impact on the global and Australian economies which in turn may have a material adverse impact on NAB’s financial performance and position.”

Banks whose central operating tenet has always been the management of risk are now being prevailed upon to alter that mindset.

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They are being asked to provide new loans to businesses that, at best, earn them little in interest and at worst may not be repaid. The government is offering to guarantee half the amount of these loans (which will be for an amount of up to $250 million).

But for the 50 per cent of the loan the government doesn’t guarantee, the banks will be wearing the risk. And these loans will be unsecured.

In addition the banks have offered an interest and debt repayment moratorium on mortgage payments for six months for borrowers that need assistance.

APRA has again been supportive. It has declared that “where a borrower who has been meeting their repayment obligations until recently chooses to take up the offer not to make repayments as part of a COVID-19 support package, the bank need not treat the period of the repayment holiday as a period of arrears. Similarly, loans that have been granted a repayment deferral as part of a COVID-19 support package need not be regarded as restructured”.

Of course there is an element of self-interest to banks putting their shoulders to the wheel. The long-term ramifications of a prolonged recession is more profound that a short to medium term hole in profits.

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