I recently ran into a mentor from my corporate banking days back in the 1980s, and he reminded me of a particular day in my career back in the days when banking use to be simple and you took responsibility for the deals you presented. That is, as my mentor would argue, when finance was ethical. It was 27 June, 1985, and I was writing a $30 million loan paper to the bank’s credit committee regarding equipment for an entity in the cotton industry. The deal needed to be approved and settled on 30 June, so time was certainly of the essence. It was 8pm in the evening and I didn’t leave my desk until I was called to present to the credit committee at 10am the next morning. At that point, I had completed all the cashflow sensitivities for the deal and investigated all the risks of the industry as well as the client.
The loan was further guided by the regulation that banks had to hold 30% of their assets in government securities and cash held at the Reserve Bank. So, I would structure loans according to the bank’s lending guidelines in terms of security, pricing etc. I also took full responsibility for anything written in the credit committee paper, and would expect, if anything did go wrong, I would stand accountable to the bank. Ultimately, the deal was approved based on a unanimous decision by an independent credit committee as well as on my written and verbal presentations. From that point I would manage the account post settlement and the bank paid me a yearly flat income. Meanwhile, on the retail side, deposits came rolling in and the bank’s branches happily provided housing loans, again based on the criteria of the lender’s ability to repay and the ability to show a genuinely saved deposit. The bank would lend up to 80% of the value of a property.
So, what happened? The answer is simply deregulation…on the basis it would create competition. The first of the bad debts of the late 1980s was the result of lending criteria and the procedures I took above being thrown out the window as Australian banks fought to win the business of the Alan Bonds and Christopher Skases of the world. In fact, Alan Bond had his office in our building, and it was interesting to watch bankers follow him around the foyer. The banks themselves created the losses when they lent outside normal lending criteria and found themselves caught in the hysteria of those famous personalities at the time.
Article by Debbie Organ – Managing Director, ClubsNSW Financial Services