Banks learn from past financial crises

Banks learn from past financial crises

Opinion
KEY LESSONS: Australian banks appear to have adapted and changed following past financial crises.

KEY LESSONS: Australian banks appear to have adapted and changed following past financial crises.

Aa

During the recent economic upheaval, banks have come to the rescue of business in need pretty quickly.

Aa

Fortunately, agriculture has generally missed the immediate effects of the recent economic upheaval, though other business sectors have not been so lucky.

Banks have come to the rescue pretty quickly for those businesses in need.

This has been assisted somewhat by access to money that the Reserve Bank of Australia has pumped into the system, and by the strong capital reserves the banks have in place. In previous times of financial crisis, the access to finance has not always been available.

I was recently speaking to a well respected - now retired - friend who had a 40-plus year banking career and had been through more than one financial crisis in his time. I thought it instructive to ask him what happened on previous occasions. Sometimes history repeats itself, or hopefully we learn from historical events, and respond better the next time.

Related reading: Cold coronavirus reality gnaws at ag markets

The biggest lesson that seems to have been learnt is that banks are more empathetic than they have been in the past. I know there are some people who will disagree with this statement, but I am thinking more generally - there are always exceptions to the rule.

My mate retold the story about his experiences during the credit crunch of the late '70s. At the time he worked for the Development Bank, and credit was being rationed, which was driven partly by the RBA. He said it was like triage in a hospital, as those businesses with the best long-term prospects received the money, while others didn't and went out of business as a result. It wasn't a good time for anyone.

A byproduct of the credit crunch in the '70s was the formation of the bank bill market, as this product was off the balance sheet and not subject to RBA credit restrictions. This product is the backbone of business lending to this day, so maybe there was some good to come out of the grief caused at the time.

Historically, there was less tolerance to let businesses trade through bad times. The decision of whether to extend further funds was very prescriptive, and driven by ratios, not so much on budgeted projections.

Though there has been a shift in this through time, sometimes it is very tough for banks to keep backing businesses that are continually losing money and eroding their equity. This scenario generally doesn't end well, and something has to give eventually. In these cases, the sooner the conversation starts about the long-term viability of the business, the better it is for both parties.

It is incumbent on the business owner to know their numbers, and be constantly thinking about 'what if' scenarios.

Banks and their business customers can learn many lessons from looking at the past. Banks have generally jumped on board with the new reality and I think business owners have as well, in the most part.

It is incumbent on the business owner to know their numbers, and be constantly thinking about 'what if' scenarios. This way any potential issues can be dealt with before they become insurmountable.

If for whatever reason a dispute between the bank and business owner does arise, the customer can get help - this is where a professional third party mediator can be of use.

Getting on the front foot and communicating clearly is by the far the best course of action a business owner can take. Understanding the financial drivers in your business is crucial; knowing this information will assist in sound decision-making.

Start the day with all the big news in agriculture. Click here to sign up to receive our daily Stock Journal newsletter.

Aa

From the front page

Sponsored by