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Anderton's banking probe: Breakthrough or beatup?

By Shoeshine

Friday 11th July 2003

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On the scanty evidence available, Shoeshine reckons our top civil servants deserve enormous pay rises.

So overworked are our public officials that they cannot, in Shoeshine's experience anyway, even afford the 30 seconds or so it takes to return a call from a journalist.

Doubtless this is because of the relentless demands made of them by their ministers, who quite rightly insist on getting the taxpayer's money's worth.

And so it was with the Ministry of Economic Development's Reg Hammond, manager of the industry development policy branch and of the information technology policy branch.

Shoeshine was ringing to inquire what might be the propelling force behind the ministry's interest in bank lending to the small-to-medium enterprise (SME) sector.

The ministry has commissioned Bruce Wattie, a partner in the corporate finance division of PricewaterhouseCoopers, to look into the matter and to report back. The report was originally due in May but has been held up. A draft is circulating among officials and "interested parties" and it's unclear whether the final version will be released publicly.

So for the time being at least taxpayers keen to know what is being done with their money and why will have to be satisfied with conjecture and speculation.

Fortunately there is a rich vein of this in the banking sector, where some suspect a bit of political grandstanding is in the pipeline.

The probable catalyst for the attention of the ministry, which has never before taken an interest in such matters, is a speech delivered in July last year to the Australasian Institute of Banking a nd Finance by Jim Scott, executive chairman of Aquiline Holdings and a former chief executive of Air New Zealand and of NorthWestern Airlines.

Scott mainly lambasted the trading banks but politicians and bureaucrats also got a rocket for their lack of appreciation of the importance of the SME sector to the New Zealand economy.

His arguments went basically like this.

Tens of thousands of SMEs produce stable, reliable cash flows and "bankable" high- quality earnings. If they were larger corporations they would be able to leverage their balance sheets by borrowing money from the banks on the strength of those cashflows and earnings alone.

The banking community, however, treats them as if they are humble consumers borrowing to buy, say, a house, and demands as security not only the businesses' assets but also the owners' house, boat, car, bach, wife, dog, etc.

Many SME owners also regard equity as "free" and bank debt as "expensive." As a result few SMEs are appropriately leveraged ­ that is, they aren't using their capital in an efficiency-maximising way ­ and many operate with 100% equity balance sheets "to keep the demons from the door," as Scott puts it.

This has resulted in many hundreds of millions of dollars sitting idle within SMEs which, if replaced by bank debt, would be freed for investment in growth, providing a huge lift to the economy.

While the banks are the main villains of Scott's piece he also castigates politicians, who "resort to picking business winners that are generally exporters or technology companies in electorates of particular interest to them," and their bureaucrat advisers who "seem locked into a time warp and are forever gazing into the rear-view mirror looking for guidance."

Many in the banking industry acknowledge Scott is an able and experienced businessman. Nor is anyone suggesting PWC would knowingly be a party to a political beat-up.

But they are nervous about Scott's speech, which they claim betrays a poor understanding of the realities of business lending, appears to be the starting point of the ministry's inquiry.

Some also suspect the motives behind the report's commissioning. Nobody, they point out, ever lost votes by beating up banks, no matter how foolish or ill-informed their arguments. The fact that the bureaucrats' boss is Economic Development Minister Jim Anderton, architect of Stonehenge-era resurrection Kiwibank, does little to promote confidence in the exercise's integrity.

Any beat-up will have to start from the premise banks act, as Joe Blow public suspects they do, as an effective club or cartel that somehow colludes to manage its collective margin; a preposterous notion.

But if the banks compete aggressively for customers and there is still a rump of quality lending opportunities left out in the cold, what's to be done about it?

At the risk of stating the obvious it would be pointless for the government to commission a report into debt-financing of the SME sector unless it was prepared to act if a problem is identified.

So what are its options?

One suggestion from a senior banker ­ somewhat tongue-in-cheek, perhaps ­ is that the government could guarantee bank loans to deserving cases. That is, the taxpayer would put up security for loans the banks would not otherwise make.

This would require the establishment of a whole new bureacracy responsible for sorting from the banks' chaff pile the deserving from the undeserving.

But one such agency already exists. Kiwibank's charter doesn't allow it to make business loans but that could change if Anderton is able to persuade his cabinet colleagues it would be for the national good.

Option two is essentially the same as option one. That is, the taxpayer underwrites loans bankers in a competitive sector will not make.

Shoeshine's bet is that Anderton has a snowball's chance in hell of slipping either scheme past dryballs Finance Minister Michael Cullen.

That's not to say the whole exercise will have been a waste of time. Scott raised a multitude of important issues and PWC's report will, hopefully, be well-researched and rigorous.

Banks have contributed a wealth of information that has never before been collected. The issues are vastly more important to our economy than Tower, whose agonies have filled the business press day after day for weeks and months.

The report should be released publicly so everybody can examine the facts and have their say.

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