Why won’t those wretched banks lend money? That is a question many European and American politicians have asked in recent months.
For as the global economy ails, there is growing anxiety about the seeming failure of banks to support growth. So much so, in fact, that this week my Financial Times colleagues reported that British regulators are now quietly loosening some bank rules to encourage more loans – particularly to small businesses, and other seemingly "worthy” borrowers.
But as the political frustration bubbles, it is instructive to take a look at a presentation about bank behaviour recently made by Phil Coffey, the chief financial officer of Westpac, to Australian regulators and financiers.
For while Mr Coffey’s vision is primarily shaped by the Antipodean market, his comments apply to Europe and the US too; indeed, the only difference is that Mr Coffey’s location leaves him speaking with a sense of clarity and honesty that is (sadly) all too rare in the politically-charged arena of the City or Wall Street.
So what, in Mr Coffey’s view, is the reason why those banks will not make more loans? He cites three key points. The first issue (which is often underplayed) is a change in the behaviour of bank customers.
Most notably, as I have noted in previous columns, consumers and companies are currently in a deleveraging mindset. Hence 41 per cent of Australians want to put their spare cash into a bank deposit, up from 28 per cent five years ago, and 23 per cent want to pay down debt, double the ratio five years ago.
And "like households, firms have tended to behave cautiously, prudently consolidating their balance sheets, limiting debt and growing their holdings of low-risk assets,” Mr Coffey says.
Little wonder, then, that Australian bank deposits are an eye-popping 54 per cent up from late 2007.
Secondly – and more obvious – banks are being affected by a deluge of regulatory reform. Never mind those Basel Capital rules that financiers keep complaining about; subtle reforms on, say, liquidity coverage ratios are also biting hard.
This makes banks far more conservative about lending money and fearful about how they manage their balance sheets. In particular, chief financial officers are desperate to hang on to their swelling deposits, by cultivating long-term relationships and paying more to depositors.
Then there is a third, less-recognised – but equally crucial – issue: funding.
Before 2007, CFOs presumed that they could always meet rising credit demand from their customers by tapping wholesale markets. The dominant cultural vision of credit, as a social anthropologist might say, was an elastic thing. But during the financial crisis, wholesale markets suddenly closed, cutting off that source of credit for banks and prompting groups such as "Northern Rock, HBOS, Dexia, Countrywide, Washington Mutual and so on” to collapse.
That sparked a cognitive shift: suddenly credit was no longer viewed as a bottomless pit but became a finite commodity which needed to be rationed.
Or, as Mr Coffey says, the days of "tapping endless wholesale funding to meet all comers are behind us”. And while central banks have tried to replace those wholesale markets, few CFOs trust that this central bank money will always be there.
That has not just affected recent behaviour but could curb loans in the future, too. Most notably, if there is more demand from customers for credit in future times, banks are likely to ration that credit by raising the price.
If this rise in credit demand occurs alongside falling deposits, banks will get doubly nervous and are thus "likely to lean against or even curtail a dramatic increase in demand for credit due to a change of preferences in risk,” Mr Coffey insists.
Now, bank critics would undoubtedly argue that there is some special pleading in all this. Perhaps so.
After all, that private sector deleveraging should (eventually) come to an end. So should the freeze in wholesale bank funding markets. Indeed, if you want to feel optimistic, you can already see hints of a thaw. As Morgan Stanley notes, bank funding costs have just fallen below investment grade companies in the eurozone.
With or without any special pleading, what is crystal clear is that getting banks to make more loans is not something that can be done with regulatory tweaks alone; nor with stern sermons.
After all, two out of the three key factors lie outside policy makers’ control; reshaping that new cultural perception of credit could take years.
Politicians should take note – and not just in Australia, but in the (less frank-talking) world of British finance, too.
Copyright The Financial Times Limited 2012.