The fifth pillar furphy | Nick Samios | Commentary | Business Spectator 2/12/10 12:49 PM

Commentary 2 Comments

The fifth pillar furphy

Nick Samios
Published 10:23 AM, 2 Dec 2010 Last update 10:23 AM, 2 Dec 2010

Wayne Swan’s latest attempt to level the banking playing field by opening up the government
guarantee to credit unions to create a fifth pillar will seem hilarious to some.
But they’re not the only one laughing. There are a number of bank jokes are doing the rounds
on the SME cocktail circuit this festive season. Instead of “a guy walks into a bar..” they start
with “a guy walks into the bank”.
Have you heard this one? A guy walks into the bank. He is the owner of a fast growing and
innovative export business. Needs finance for two new trucks so he can expand his business –
presumably adding to Australia’s productive capacity so it can generate more export income,
create jobs in Australia instead of overseas etc. The business banker turns him down –
something about his balance sheet, blah blah blah.
So he walks around to the “Personal Banker” and puts in a second application – this time for
the same amount of money but for a luxury car instead of the two trucks. Guess what – the
personal banker approved the finance. He then went back to the business banker with that
approval and tried to get the car swapped for the trucks he needs. No punch line yet – that
bank is still thinking about it.
Now nowhere in this story is there anything about the entrepreneur trying to nickel and dime his
bank on fees or interest rates, but for some reason pricing is the populist obsession when it
comes to SME lending at the moment.
Indeed pricing appears to be the reason why Wayne Swan is reportedly considering extending
the government’s guarantee scheme to building societies and credit unions.
Now I know the cafe intelligentsia are big on belittling “bank bashers” who they say are simply
too unsophisticated to understand funding costs and other esoterics of high finance. But what I
don’t get is why the major banks are spending so much money on expensive television
advertising trying to get SMEs through the doors if they aren’t set up to follow through on the
rhetoric.
Too much analysis on SME lending is focused on pricing – on the ground, pricing is not the
issue. Its service and credit policy (per the anecdote above).
It’s true that banks are getting a premium on business loans secured by residential mortgages,
and it’s true this margin has grown since the GFC. But this is more of a “return to normal” than
gouging on the part of the banks. Home loans are serviced by wages and salaries, and these
are much more predictable than the cash flows and profits of SMEs that service business loans,
so there is a risk premium that was priced out when the credit markets overheated pre-GFC.
But that’s not my main point. I have not met an SME owner who would not gladly pay a few
extra points on their business loan if it meant they had more access to business bankers who
actually had authority to make commercial decisions. With the benefit of fast commercial lending
decisions – and a little occasional rule bending – the SME owner can grow his or her business
well past the point where a few extra percentage points on their debt make any material
difference to their bottom line.
Swan wants a fifth pillar in banking. Will that help SMEs? If you think the answer is “yes,
because it will drive interest rates down” I think you are on the right horse for the wrong reason.
The answer should be “yes”, because the banks will start trying to value add beyond
atmospherics and post-modern reconstructions of our concepts and the discourse of “banking”
(have you seen some of these ads?) – that is, by looking for ways of commanding premiums by
adding value to service and credit policy instead.
Nick Samios is MD of factoring financier Hermes Business Capital and a regular contributor to
Business Spectator.

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The fifth pillar furphy | Nick Samios | Commentary | Business Spectator 2/12/10 12:49 PM

2 Comments

Evan Jones wrote:

"Too much analysis on SME lending is focused on pricing on the ground, pricing is not the
issue. It's service and credit policy (per the anecdote above)" (See The fifth pillar furphy,
December 2). Exactly right, and I've been saying it for years.
But Nick Samios blames the wrong people for the misplaced emphasis.
There is no 'populist obsession' with pricing. And the 'cafe intelligentsia' have nothing to do
with it.
It's the mainstream financial media, the economists and the economic bureaucracy (which
would have Swan's ear). i.e. the establishment.
Markets only mean prices to this poorly trained mob. Nobody, but nobody, in authority has
any idea about the importance of the full dimensions of the 'product' in long term contractual
relationships.
Add the legal profession and the judiciary, who continue to fail to understand the banks'
failings from their side of this relationship.
2 Dec 2010 11:51 AM

David Peterson wrote:

We don't need a fifth pillar in banking, we need a tenth! There is far too much concentration
in Australian banking. The GFC simply provided a convenient opportunity for the majors to
further strengthen their grip – Westpac with the St. George acquisition (or heart transplant
perhaps), and Commonwealth with the BankWest fire-sale. (See The fifth pillar furphy,
December 2.)
Despite all international experience to-date (BoA and Countrywide in the US, Northern Rock
et al in the UK), we seem intent on positioning ourselves to create a few TBTF banks of our
very own. Why do we not heed the lesson of the USA, rather than seeking to repeat it? Let
those treasury dollars flow from the "discount window" they will surely cry, when the time
comes! In the meantime, the casino is OPEN and it's playtime.
2 Dec 2010 12:29 PM

http://www.businessspectator.com.au/bs.nsf/Article/Wayne-Swan-Fifth-pillar-interest-rates-banks-debt-pd20101202-BQVCS?
OpenDocument&src=sph

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