Transcript of Question & Answer Session The Availability of Business Finance

Thank you so much. Just wonder whether there are some questions from the floor, please. Do you want to just wait for the microphone?

Thank you very much. I have a question regarding the conference of credit reporting. You said that for smaller businesses, the probability of default might be higher, although there might not be enough evidence to show that. Does the Australian scheme look also then into loss given default, and recovery rates because that's the important thing. How big is the loss really, when a default is given? How does that connect to the comprehensive, yeah, risk reporting. Thank you very much.

Right. I think that's an important question. I don't have all the data to hand. I alluded to some data, which as you suggested yes, only talks about the probability of default, not the loss given default, which is extremely important for the expected or the possible losses. If you go to the paper on the website, there's a little bit more discussion of that, which makes that point, and then alludes to the fact that for much of the small business lending of course, it's backed by collateral, much of that is housing. And of course, that makes the bank not necessarily … the business may have defaulted, but the bank's not necessarily making substantial losses, once they recover the collateral.

I don't know, and that's part of the reason why I don't know if those rates being charged on the small business loans, are sort of fully reflecting that higher risk. The risk is higher, I think that's undeniable, but whether it's fully reflected, it's not clear. The problem when you have an informational problem and you don't have enough information because the information, even if it's for an established business, it may not be available, particularly their positive credit history may not be available to banks. The banks not having that, will have to charge on average, all businesses a little bit more, because the business could be one with a poor credit risk. It may not have such a positive credit history. It may have no credit history.

The point about comprehensive credit reporting, if you can make that available to all the banks, they can more accurately price the risk to each and every business, depending on their credit history. I think that's the point I was trying to make.

You showed a very large difference between small borrowers and large borrowers' rates. I'm just wondering if we have a continuum of the size of the borrowing, does that difference decrease significantly, so in other words to some extent, reflects the cost efficiency resulting from the size of the borrowing, or do you think, is there a step, a big step once the so called business gets above a certain size?

Yeah, I think, while that's a good question, I don't have the answer to that partly because I'm not sure how granular the data is, in terms of all of those rates and whether you can do a nice … I don't have the unit records on the small business loans, as they get bigger, as they turn into medium sized businesses and then into large, how those rates on those loans transition. I think they're fairly coarse data, and so it's hard to answer that question. It's a good issue, though.

With regard to large business, question here is globally, obviously, many large corporations slow down their level of investment in the last four or five years. Do you think there could be any correlation between less demand for credit by large business due to external forces, rather than only Australian factors, which could slow down maybe demand for borrowing by large corporations, when we compare with small business? In other words, international factors in this process?

I think the international environment has had a very important influence on investment in Australia. I think that's why it's quite positive that we're seeing a fairly synchronised lift in business conditions, business profitability, and business investment globally, particularly in many advanced economies, but not just in advanced economies, also in a range of economies, right around the world. I think, what I don't know is, because I've only really peered into the Australian data which just said, at least for the business sector as a whole. This is not true of small businesses.

At least for the business sector as a whole, it does seem a fairly, I think that dot plot that I showed is fairly convincing to suggest not that external finance and credit is unimportant for investment decisions, but it's the internal profits that seem to be a better indicator, if you like, or more correlated with the investment. As business conditions pick up, which is true globally and in Australia, as profits pick up with that, businesses then look for opportunities, and they have access to finance to undertake investment. That's what's been happening, I think not just in Australia, but globally. Whether there's that tight link between internal funding and investment, is tight as it is in Australia, I'm not sure, because I haven't looked into the international evidence.

There is an alternative source of financing these days, we're talking about is ICO, Initial Coin Offerings, using cryptocurrencies. The central banks are taking very strong positions on that. I was wondering what the Reserve Bank of Australia has a position on that, whether you're thinking about how to regulate this sort of alternative financing or you have a position at all on this. Thank you.

Yeah, well, we don't have regulatory responsibilities in terms of the financing side of the equation. We have some responsibility, once mechanisms become, move into the payment sphere, because we have a Payment System Board, which has powers in that realm. I'd refer you actually to a speech the Governor gave in another hotel this morning at a slightly different location earlier this morning, on the sorts of topics, where he talked about … I know you talked about Initial Coin Offerings, which is not unrelated to Bitcoin. But he talked about, at least with regards to Bitcoin being of a speculative, highly speculative nature and not really constituting a payments mechanism. I think on the Initial Coin Offering, what companies are doing, is they're looking to raise funds, and they're offering up these cryptocurrencies of one form or another, as people give them recognised currencies, US dollars, let's say, in exchange for coin offerings.

The thing that crosses my mind is why are investors doing that, in preference to actually taking a contract, which is written down and more explicit and at least is a form of let's say, if not debt, then equity, where they have some rights as owners of that company. They're not doing that. Again, those feel like they have certain speculative elements, which are not unrelated to the speculative elements of these, of things like Bitcoin.