RBA refuses calls to guarantee small business loans
(14 March 2010 – Australia) The Reserve Bank of Australia has refused calls for the government to offer a guarantee scheme for small business loans.
Guy Debelle, assistant governor at the RBA said that the Reserve Bank had examined the schemes, which are operating in the US, Britain and Canada, and found they had mixed success.
Mr Debelle said that the low take up of the scheme could be explained by the fact that governments require a fee of between 2 and 3 percent to compensate for the risk of guaranteeing small business loans.
'It would be a very large obstacle,' Mr Debelle added.
The head of the bank's domestic markets operations, John Broadbent, said there were concerns about any form of government-guaranteed lending.
'Our view is there's a threat of moral hazard in guaranteeing anything,' he said, with lenders likely to take bigger risks if they thought the government would pick up the tab for anything going wrong.
Mr Debelle said there had been signs over recent weeks that the banks were keen to lift their lending to small business.
'Banks are looking a lot more aggressively at small business lending,' he said, although risk levels had not returned to the practices that prevailed before the global financial crisis.
The banks remained very cautious about commercial property, he said.
However, there were more non-bank financiers offering 'equity-like funding' for property projects.
The Australian Chamber of Commerce and Industry submission to the inquiry recorded that some form of government support to small business lending was offered in the US, Canada, Japan and Korea. It called on Canberra to explore the strategies adopted in these countries.
Mr Debelle said that the low take up of the scheme could be explained by the fact that governments require a fee of between 2 and 3 percent to compensate for the risk of guaranteeing small business loans.
'It would be a very large obstacle,' Mr Debelle added.
The head of the bank's domestic markets operations, John Broadbent, said there were concerns about any form of government-guaranteed lending.
'Our view is there's a threat of moral hazard in guaranteeing anything,' he said, with lenders likely to take bigger risks if they thought the government would pick up the tab for anything going wrong.
Mr Debelle said there had been signs over recent weeks that the banks were keen to lift their lending to small business.
'Banks are looking a lot more aggressively at small business lending,' he said, although risk levels had not returned to the practices that prevailed before the global financial crisis.
The banks remained very cautious about commercial property, he said.
However, there were more non-bank financiers offering 'equity-like funding' for property projects.
The Australian Chamber of Commerce and Industry submission to the inquiry recorded that some form of government support to small business lending was offered in the US, Canada, Japan and Korea. It called on Canberra to explore the strategies adopted in these countries.
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