Our Love Hate Relationship with the Banks
We freely admit that the strength and efficiency of our banks have saved us from the worst of the worldwide recession. At the same time our Government, media and everyday Australians announce that banks are bastards.
We praise them for avoiding the sub-prime crisis through having strict lending standards and at the same time are asking them to relax these standards and lend more freely. We know that our banks have kept their international rating by being profitable, but our Government demands that they reduce that profitability by absorbing interest rate increases on their overseas funding.
Perhaps our attitude is guided by history. Moneylenders have always been appreciated when people need money but reviled when they have to repay it. We can only think of Shakespeare's Shylock which shows lenders suffered from bad PR – even in Elizabethan England.
Despite this historical attitude money lending has always been necessary as people need money to expand their business, build a house or meet unexpected emergencies. At the same time people with surplus funds look for investments. One can always feel sorry for people who find themselves in difficulties through having borrowed too much but their failure to repay erodes or destroys some savings. The position is further complicated by the fact that most Australians, either through themselves or through their super fund, own shares in our publicly owned banks. Perhaps we should remember the following:
- Banks are businesses and must justify their existence by making profits.
- They exist to lend money. They will get bad debts from time to time but that is generally the fault of the borrowers. Banks may investigate potential borrowers but are limited, through privacy laws, by the information they can get. They must rely on the good faith of the borrowers who know their own circumstances.
- Interest is determined by the market, not the Reserve Bank. They can only influence local lending and borrowing but, since Australians do not save enough, the banks have to borrow most of their funds from overseas where the Reserve Bank has no power.
- Banks earn a lot of money from fees charged both as penalties and charges for services. The penalties need not be incurred by the clients.
- Bank profits may be large but the amount of money invested is huge. When one looks at the Stock Exchange one realises that they do not think profits are excessive. Bank shares have been marked down by the Stock Exchange.
Nothing that I can say will improve the historical regard for banks but we believe people should be more aware of the obligations and benefits of borrowing from them. Among these are:
- The ability to repay is the obligation of the borrower. Securities given can and should be exercised in the case of default.
- Check loan documentation carefully, using a lawyer if necessary.
- Factor in reserves for contingencies (e.g. health, job loss etc).
- Be careful about credit cards as interest rates and charges are high.
- Remember interest rates can go up as well as down.
- If you are getting into financial problems seek advice.
- Do not be greedy and borrow to finance risky investments.
Remember a bank is a business whose survival depends on making money for its shareholders. It is not your guardian angel. If you take out a loan based on false information, failed to read the terms or face adverse circumstances, the fault is yours. People who make bad or risky investments should not blame the banks. Blame their financial advisers who suggested those investments. If an investment is sold on the basis of a higher than normal return it is a higher than normal risk. Individual bank staff may make mistakes or take shortcuts but you are the one who borrows the money or guarantees someone else doing so. Be careful!
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