A snapshot of the current lay of the land.

Bankers and guarantees

Who would be a banker? In both Doggett, and Rose, the Victorian Supreme Court and Court of Appeal allowed guarantors without "special disadvantages" to avoid business guarantees. Both Courts reasoned that the Code of Banking Conduct requires bankers to "prominently" make the guarantor aware they may become responsible for paying a guaranteed debt. Merely placing a warning to this effect in big bold letters on the document is not always enough, even for an experienced businessman "perfectly capable of protecting his own interests".

A cultural change

The Code, for the present anyway, has been judicially construed to place a greater emphasis on a values-based approach to bank dealings with customers. Placing the customer first, even a customer in financial default, mirrors, in many ways, the present leading trading bank approaches to customer dealings in default situations. The emphasis within the trading banks, and on advisers, is to look for customer-focused solutions that provide the customer further chances to resolve its own situation. This is variously presented as forming part of the banking culture to "put the customer first" or as being defensive in nature, as protecting the brand.

Restatements rather than forbearances

In the immediate aftermath of the GFC, when the "mark to market" values of many businesses or their key assets were uncertain, financial institutions often entered into forbearance arrangements, providing time for the market to settle or for the customer to find another solution (typically involving a sale if the customer could not refinance).

Marking a new approach, banks now typically restate the terms of loans, for example, amortising repayment obligations, changing interest or asset or market value coverage ratios, waiving default interest and other charges, altering security rights or compromising (forgiving) part or all of the loan. Restated loans allow customers time to search out solutions to restore financial non-performance ‒ or put off today a problem for tomorrow.

The paradigm industry example is the rural sector where banks are generally wary of enforcement against defaulting farmers.

It remains to be seen whether a decision to extend farming loan maturities to better seasons, to introduce further funding for fertilisers or more productive equipment is in the long-term interests of defaulting rural customers. For the moment, though, the willingness to reset loans to provide another opportunity for the customer to succeed, or fail more harshly, means that instead of forbearances, banks are more willing to restate or novate loan arrangements.

Noticeably, trading banks are taking similar positions in relation to exposures in mining services and related industry credits.

Of course, new lends look for credit quality. While farmers, mining services, retail and the like within the banking system can expect, for now, to see a greater willingness to negotiate rather than enforce on defaulting positions, new customers are finding new credit hard to come by from trading banks. With, perhaps, one exception: retail property.

When APRA changed the capital rules in 2015 to encourage banks to place more capital with business than residential property, it did so to reduce bubbles forming in particular residential assets. The dual impact of IFRS 9 and Basel III may undo that good work, encouraging banks to move risk capital away from pricier corporate lending and into property credits. This will not amuse the two Australian trading banks who hold books with full property spreads, nor property developers not considered to be "tier one" credits. The former cannot lend more into investment or commercial property, the latter cannot attract debt capital from the trading banks, no matter how supported the project with presale or agreement for lease commitments. Something will need to give ‒ hopefully, not integrity.


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