PODCAST

The banks have an important role to play in economic stability

Madeleine Mattera Madeleine Mattera

The financial services sector is prepared for a downturn

The COVID-19 pandemic is not only a health crisis, it’s also precipitated an economic one. Policy makers, consumers and businesses are all concerned about what will come next, and the impact this will have on jobs and cash flow. The banks, and the wider financial services sector, have an important role to play in our economic stability now, and recovery in the future. What many people may not know is that many institutions in the financial services sector – banks, superannuation and insurance – are all required to have plans in case of a pandemic, and are regularly stress-tested to ensure they can operate and support the economy in the event of a recession. Compared to the global financial crisis in 2008, the banks are more resilient, hold more capital and can withstand such shocks.

Listen now as Madeleine Mattera, National Head of Financial Services at Grant Thornton discusses the current COVID-19 crisis and the role of the banks in supporting our economy, the significant moves we’ve seen from the RBA, and ‘pandemic plans’.

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Podcast transcript

Velvet-Belle Templeman

Welcome to Boardroom.Media.  My name is Velvet-Belle Templeman and I'm here talking to Madeleine Mattera, National Head of Financial Services at Grant Thornton.  Madeleine specialises in mid-sized clients in the financial services industry.  Today we'll be talking about what the financial services industry can do to support the economy during the constantly evolving Covid-19 pandemic.  Madeleine, thanks so much for joining us.

Madeleine Mattera

Thank you.  Great to be here.

Velvet-Belle Templeman

First off, I just wanted to touch on the major announcements that were made last week, the RBA package and the small business assistance package offered by the banks.  So Madeleine, what was your take on the RBA package?  Has the RBA ever done something like this before?  And do you think that this is a sign that we're about to slide into a recession?

Madeleine Mattera

The RBA package is a very interesting one.  It came out very quickly and it is actually quite comprehensive.  It's a very significant size facility as far as the layman is concerned.  But I do believe the RBA actually has more funding that it could bring to bear, which I'll talk on in a moment.  But it is actually quite unprecedented.  It has not done anything like this before.  Now clearly the RBA is concerned about the state of the Australian economy and I do share that concern and the pictures on the TV of people queuing up outside Centrelink offices is a very, very potent signal that the economy has nosedived very suddenly and severely.  I think a recession is very likely and getting more likely by the day.  My take is that the March quarter will actually show zero or negative growth and the June quarter may well show something similar.

Velvet-Belle Templeman

Well that is concerning.  Now part of the RBA package is a three year funding facility, which I understand is for at least $90 billion to ADIs is at a fixed rate of 0.25% what does this mean in layman's terms and what impact will this have on the broader economy?

Madeleine Mattera

Yeah, so the RBA funding facility is a funding facility which is being extended to the banks.  And when I talk about banks, I talk about major banks, credit unions, mutual banks and so forth.  This is a very significant development because it actually allows the banks to have liquidity.  So the RBA is not making money available to you or me or the cafe owner or the restaurant owner, but it is actually making the funding available to the banks so that they can actually continue to lend and also continue to support existing loans on foot and be accommodating to borrowers who may find themselves in financial difficulty.  And the fact that this funding is being extended at the rate of 0.25%, which is the new record low interest rate is actually quite significant because it means the RBA is actually not taking any form of margin on the funding that it is extending.  It's very affordable for the major banks.  This is actually enabling lending to continue, which actually supports the economy.  It may not actually increase economic growth, but it may indeed stop us from falling further into recession.  If it's very successful, it may actually stop us falling into recession all together.

Velvet-Belle Templeman

Do you think we'll be hearing more announcements from the RBA in response to the coronavirus?

Madeleine Mattera

Well, that's a very good question, and whilst none of us really know where the Covid-19 crisis is going to go, I think it's useful to understand that the RBA does have still some tools left in its kitbag, so it could actually reduce interest rates even further.  And also it could actually go into what we call Quantitative Easing, which is a term that gets bandied about in the financial press.  What does that mean?  It means the Reserve Bank can actually buy up government bonds and in doing so, inject more money and liquidity into the economy.  Now it's not done either of those things as yet, but clearly there's two very significant things that it can bring to bear if it sees fit.  And I think whether it does that will depend on the extent to which the coronavirus crisis deepens.  Or alternatively, if infection rates start to decline and it is being brought under control, which has not yet happened.

Velvet-Belle Templeman

So on Sunday, the Prime Minister, Scott Morrison, and Treasurer, Josh Frydenberg, announced early access to superannuation funds as part of the second tranche stimulus package.  What's your take on this?

Madeleine Mattera

This is a very significant development.  There is already a regime in place which allows the customers and superfund members who are experiencing financial hardship to access $10,000 per year out of their superannuation.  This measure is on top of that and it is far easier to access the $10,000 under this regime than it is under the financial hardship regime.  The legislation has not yet been passed.  I understand it won't be passed until later in April, but this is clearly a lifeline to people who have money in their superannuation.  But are otherwise out of work facing reduced hours or a very uncertain future, and it can certainly mean the difference between maybe becoming insolvent or bankrupt and being able to sort of tide yourself over during these difficult times.

Velvet-Belle Templeman

That's some really great news for the most vulnerable in our society then.  Another major announcement made last week was the Australian Banking Association and the banks releasing a small business relief package, deferring loan repayments for six months for small businesses affected by Covid-19 the big banks are also looking at other ways that they can support their customers.  From your perspective, what is the role of the banks and other financial services institutions in the economy at this time?

Madeleine Mattera

Look, it's a really important question as to what the role is rather than what the bank can do for an individual customer.  The banks actually have a very important role to play in the financial services sector in Australia in that when they lend money or they continue to support lines of credit granted to existing customers, they're the cafe owner, the restaurant owner or just you and me in terms of our mortgages on our homes, they actually keep the economy running.  And the important thing to note about the bank in Australia now as opposed to perhaps before the GFC in 2008 is the banks are actually very strong.  They're very well capitalised.  They're in the top quartile of capital that they hold compared to their global peers.  And that just means they're strong.  They can withstand shock and they can support the economy.

The other aspect to note is that the banks actually have been for many years in the position of having a pandemic plan that they have to keep on the books to activate in the case of something like coronavirus.  So this is the banks have actually stress-tested for what happens in a crisis like this, they have actually activated their pandemic plan.  So they're already doing what they need to do.  They are strong, they know what to do and they are actually resilient.  And I think that's very important for us to understand that we can have confidence in the banks.  And I don't, I don't just mean the four major banks.  I mean, you know, mutual banks, credit unions, foreign banks, and some of the neobanks in the Australian economy.  So the banks are there to actually support us and underwrite economic growth and financial stability.

Velvet-Belle Templeman

Many of your clients are amongst the smaller ADIs and community banks as well as Australia's first neobanks.  What's the sentiment like amongst your clients and their customers?

Madeleine Mattera

Smaller banks and neobanks are in a position where they know that they have the capital to support their customers and they are already looking at ways that they can support their business customers and also their home loan customers.  I think they are cautiously optimistic.  They do know that they have the levels of capital that they need to do what needs to be done and they are also getting support from other regulators.  So, and we haven't talked about APRA, which is very important regulator to be aware of when we're talking about the banks because APRA is the regulator that essentially looks after the banks as well as insurers and superfunds in Australia.

APRA has given the banks their support in terms of being able to use some of their capital to support their customers.  And I think being able to have that latitude to do what needs to be done and support customers when they are experiencing difficulty is a really good place to be in.  So again, the smaller banks and community banks have been doing their stress testing, they're activating their pandemic plans, they know what to do, they've done it before and they've actually stress-tested for things such as 30% unemployment, which is almost unthinkable.  But I did hear it mentioned on the news during the course of this week.  Now nobody wants 30% unemployment.  But if it does happen, I think it's worthwhile understanding that our banks are prepared for it.

Velvet-Belle Templeman

That's fantastic news.  So we've been talking a lot about the role of the financial services sector, but how is the sector fairing in response to the uncertain economic outlook?

Madeleine Mattera

That’s a really good question.  I think the banks will see a reduction in their growth during the course of this crisis.  Banks will also see an uptick in the bad and doubtful debts.  There's no doubt about that as customers may have difficulty paying their home loans or paying their business loans.  Banks will have to take more provisions.  So we won't necessarily see any increase in profits in the banking sector.  But if we think about the financial services sector as broader than the banks, it’s worthwhile thinking that there's also insurance companies and superannuation funds.  Now they remain quite financially strong but the decline in world share markets, including the Australian share market, has meant that for example, superannuation funds have experienced a drop in their actual asset levels because of the drop in the share market.  And unfortunately, what that means for you, me and the restaurant owner and the cafe owner is that our superannuation balances have actually taken a hit.  Now we expect that to recover when the share market recovers.  But the key thing to remember is that we just need to ride out this period of crisis and uncertainty.  We hope that it won't last as long as 12 months.  I think we need to be prepared for those eventualities.

Velvet-Belle Templeman

So in terms of preparation, the Prime Minister has said that we're in this for the long haul.  What do you think is the outlook for the sector over the next six to 12 months or even beyond?

Madeleine Mattera

I think it could go be a challenging period.  Now, as I said before, the banks in particular have stress tested for scenarios of six to 12 months of economic uncertainty and upheaval, so they are prepared for that.  But clearly the longer this goes on, the more challenging it will be for all of us, including the financial institutions.  But we need to remember that we can work together.  The banks are there to support us.  There are relief packages that people can take advantage of now. If the current relief packages extended essentially for a period of six months.  If this goes on for longer than six months, I think we need to be thinking that the government should be providing additional follow-up relief packages to support the economy, including the financial services sector.

Velvet-Belle Templeman

Madeleine, thank you for your time. 

Madeleine Mattera

Thank you very much. 

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