Parallel banking universes

Wayne Swan worries that we'll end up with a two-speed economy as a result of the mining boom, but if he really wants to see inequality, he should take a closer look at what the country's banks are doing.

When it comes to accessing finance, it's now clear that there are two distinct banking universes, with a huge gulf running between them.

One world is populated by the large, healthy corporates that were able to take advantage of the recovery in the sharemarket to raise extra capital, and pay down debt. These bankers are alert to the opportunities in this segment of the market, and are shaving their interest rate margins in order to pick up business.

But then there's the other world, the one that's inhabited by the small- to mid-sized companies, particularly those in the property, retailing and hospitality industries. These companies weren't able to tap markets for extra equity – either because they're unlisted, or because their share registers are dominated by retail investors. These companies are finding that their bankers are distinctly frosty, and that, for them, bank funding is scarce and expensive.

Undoubtedly the consolidation in the banking sector has exacerbated this division. Westpac's $19 billion takeover of St George, and the Commonwealth Bank's $2.1 billion acquisition of BankWest removed a significant slice of competition in the small business lending market.

Even worse, the large banks found that their combined loan books were too heavily tilted towards particular sectors, such as property. Small business borrowers have carried the brunt of the pain as the banks have tried to scale back their exposures.

And it's also clear that the banks have become decidedly less charitable to small- and mid-sized companies as interest rates have risen and the banks' own funding costs have pushed higher.

But the emergence of parallel banking universes also reflects a tectonic shift in global capital markets.

Banks are extremely aware that the global competition for funding is about to get a whole lot tougher. They know that when they head offshore to the wholesale capital markets, they'll increasingly be competing against sovereign borrowers, and high-rated corporate borrowers, as well as international banks to raise funds.

Last month, worries about the Greek sovereign debt crisis sparked an outbreak of skittishness in US wholesale capital and private placement markets. Straight away we saw a flight to quality, with lenders seeking out borrowers with very good names.

Meanwhile, lower quality borrowers were either forced to pull their debt issues, or else they had to pay a much higher price for the money they raised.

Last month's jitters exposed the underlying nervousness in international capital markets, and the extent to which power has again shifted to the lenders.

And in a world where lenders can afford to pick and choose, the sad truth is that only top-rated borrowers can be confident of raising funds at a reasonable price. Lesser quality credits everywhere are going to find it much more difficult – and expensive – to find funding.