There is evidence that banks have become too conservative in lending to some businesses, and it’s hurting the economy.
JP Morgan analyst Andrew Triggs points out that the major banks’ share of the commercial real estate loan market shrunk from about 85 per cent in 2015 to 70 per cent at the end of 2022. As the big local banks retreated, international lenders and private credit funds sought to fill this gap, but Triggs says they can be less reliable or more expensive.
This decline in the banks’ market share came about after regulators reviewed commercial property lending and decided lending standards were too lax. This led banks to tighten their policies in areas such as the pre-sales a developer must make or loan-to-valuation ratios.
This pullback from property developer lending has been a double-edged sword, which highlights the trade-offs that banks and regulators face.
On one hand, the big four banks have benefited from writing fewer bad loans. Triggs pointed out in a recent research note that the non-performing loans in the banks’ commercial real estate books were “very low,” despite the sharp rise in interest rates. But it’s also likely that the cautious attitude of banks is making it much harder to provide a much-needed boost to housing supply.
Small business lending is another area where some have argued it’s too hard for borrowers to get credit, leading to economic costs.
Barrenjoey analyst Jon Mott argued in a report earlier this year that banks had “de-risked too far” – pointing to small business lending as an example. For years, smaller firms have complained about how hard it is to get credit from a bank without putting a property up as security.