Squeezing out banking a lesson

It was hardly a surprise that representatives of BankWest and parent company Commonwealth Bank refused to appear on camera in last night’s Four Corners program on ABC Television (which you can watch here).

The program followed the stories of four BankWest customers who, following the acquisition of BankWest by CBA at the height of the GFC, had loans called in and watched their businesses collapse.

The customers – two property developers, a pub owner and a motel owner – say they tried to work with the bank but were told that the previous valuations of their businesses were scrapped and replaced with new, much lower valuations that put them in breach of loan covenants.

Receivers were called in when the customers could not meet demands for new equity.

Clearly the business owners made mistakes. None seemed to have their own valuations done during the process for example.

One didn’t even inspect the motel being purchased prior to signing up for a loan on what turned out to be a shockingly inflated valuation.

But those business owners worked with the banks to try to trade through their situations.

The pub owner had lawyers and accountants working with him on a turnaround plan of which the bank was kept closely informed. The bank still killed the businesses off.

That BankWest and CBA wouldn’t go on camera to talk, even in general terms, about why the bank needed to act as it did during that post-GFC period was extremely disappointing.

I bet today there will be plenty of BankWest and CBA customers checking loan documents and asking themselves a simple question: Will the bank work with me if I get into trouble?

To a great extent the bank’s answer will depend on which sector you are in.

What BankWest and CBA would have said, if they had gone on last night’s show and been honest, is that following the GFC there were sectors they wanted to reduce their exposure too, and fast.

Tourism, property development and hospitality were high on the list and remain sectors starved of capital. Retail is a sector that has joined the list in the past two years.

It’s nothing personal of course. The banks just want out of those industries and they are prepared to act fast and aggressively to get out.

Nationals Senator John Williams is to hold a Senate inquiry into lending by banks in the wake of the GFC. While we shouldn’t expect anything major to come out of what feels like the umpteenth banking inquiry, we can hope this one looks hard at how valuations have been used by banks to make and break business owners.

The fact that at least two of the four business owners said they had not seen the independent valuation used by the bank to tell them they had breached their loan covenants is a real worry.

The valuation issue is something that will also be a major focus of the class action being prepared by a number of former BankWest customers.

But the real issue the Senate inquiry should tackle is what role government should play when credit gets tight.

Making rules about what, when and how banks should lend isn’t the answer – that’s not the job of governments.

But as we’ve consistently argued at SmartCompany, there is a role for the government in the provision of loans to small business or support for such lending.

In the United States, in Canada, in Singapore and in many other countries governments actively and successfully support small businesses when credit gets tight.

Australia can do the same. And if we want that support in place for the next GFC we need to act soon.