Transcript of Question & Answer Session Small Businesses Finance in the Pandemic

Yeah, you may have under-delivered on the acronyms, but you've certainly over-delivered on the data and the charts, so thanks Chris.

Look, before I go to questions from our members and the media, I do have a few of my own. For those of you who know me, that's not surprising. Look, I just want to go a little bit deeper into some of the things that you've just gone through, and also just draw on a chart that actually the Governor used in a speech last week.

So one of the charts you had was is that SME retail sales were down and they're coming back, but they were down. Lending is flat in the SME space and conditions for lending may be tighter. But the chart that the Governor referred to last week also showed that investment by SMEs is probably overweight for their sector, versus say larger companies.

So is it fair to say that SMEs are actually punching above their weight and lifting this recovery more than perhaps other parts of the economy, and if we want a real business-led recovery, do we really need to be incentivising larger companies to start to do more of the heavy lifting?

Yeah, the way I like to think about that comparison in terms of small businesses, if you like, investing disproportionate to say their share of output compared to larger businesses, is partly related to the nature of some of those small businesses and comes back to a point I made at the beginning of my speech, that small businesses can be quite a force for innovation and competition, and of course many of them are trying, not all of them, but many are trying to become larger businesses. And so they do so by investing in new technologies and adopting new technologies.

There's quite a lot of dynamism in that sector, a lot of entrepreneurs that are making their mark and want to do more, and so, in some ways it's natural to think of them as doing so much investment compared to their output. That's not true of every small business, but many of them.

So I wouldn't describe it so much as sort of large businesses not pulling their weight or small businesses doing more than their fair share. It's more about that's the nature of many of the small businesses. They're very dynamic and competitive.

So what do we need to do? Well, we need to, as a central bank and as policymakers, ensure that we can do what we can to support aggregate demand, because more aggregate demand will in time mean that businesses have an incentive and a desire to invest more, and then for governments, both Federal and State, to do what they can to make the environment as conducive as possible to investment.

You also mentioned Chris, cash buffers, that businesses have got some good cash buffers, and we've heard that households do as well. Are we saving too much and not spending enough at the moment?

No. It makes a lot of sense that both businesses and households did that, in part because there were very limited opportunities to spend for households for a good bunch of last year. The most obvious one is none of us can travel overseas, for example, so there's spending that we just can't do. That's a very obvious one. So it would be natural for savings to go up.

It's also the case that savings, both of households and businesses, probably go up at a time of considerable uncertainty, and at the moment what we've seen is that those saving rates are coming down. So it's not that they're ‘dissaving’ or making their pool of savings smaller and spending them, they're just adding to them less than they had been before. So that's a good thing as it means more consumption growth, particularly as household incomes continue to pick up through employment growth in the period ahead. But it stands them in good stead if they need to draw upon their savings, particularly individual households that might be vulnerable to a loss of employment for a time.

Then for business, that stands them also in good stead to invest when they're willing and able to do that, and when they see the economic environment looking more positive for them.

We've had a question come through, which I'm going to sort of wrap up into one of my questions which is SMEG to SMERL, so the SME Guarantee Scheme has now been called SMERL, for your benefit Chris in terms of its latest version. That scheme is intended to support, as you said, those who were receiving JobKeeper previously. The risk exposure is shifting in terms of it being a 50/50 risk exposure to 80/20, and it is also now reopened to unsecured lending, so a little bit of a combination of SMEG1 and SMEG2 into this latest version.

Banks and lenders, particularly banks, are reluctant to lend to SMEs without security. I mean, do you think this scheme's going to help open up greater unsecured lending to SMEs, or what other hurdles do we need to get rid of?

Well, it creates an environment and provides and incentive for banks to be more willing to lend, particularly the government increasing the guarantee, the amount that they're guaranteeing, so that reduces considerably the risk for banks, reduces their need to ask the smaller businesses to provide large links of collateral. So that's a very positive aspect that's going to help the supply of credit one imagines.

The thing we have to remember is what about the demand for credit, and I think that might still take a bit of time. Now, part of it's because of what we just talked about, the significant cash buffers, but also businesses waiting until they see a strong pick up in aggregate demand, and a need to invest. Businesses are more optimistic, their confidence has picked up and they are employing people. Employment's really bounced back quite a bit.

So picking up on that comment just then Chris and sort of shifting into the TFF, it is about the anniversary of the announcement of that facility, as well as the AOFM's program to support smaller lenders, which I believe was on the 19th of March if my memory serves me correctly. So this Friday is the anniversary for both those initiatives. They have both done incredible work to help normalise markets at the time they were announced, and as you've said, they've helped keep rates down throughout the crisis.

The TFF has got a capacity in it that's not been drawn down on, and as you said, there's incentives to lend to small business built into that initiative. Are there more carrots and sticks that are needed to get some lending going through that facility?

No. I mean, I talked about this in the lead-up to and around the time of the initial deadline for the initial allotment of funds under the TFF, and at that time there was still a gap and funds remaining to be drawn upon, and our expectation would be that most of those would be drawn upon and then they were. The banks, because they've got funding from a whole range of sources, aren't in a hurry to lock in that term funding, because it's available for three years. So our expectation is much the same pattern will repeat closer to the deadline an increasing share will draw upon those funds. They will lock in that very low rate for three years and then be able to take advantage of that cheap source of funding. So that's our expectation and it remains the case.

So a number of AFIA members have been letting me know about the appetite that they're seeing from customers, and I think you've touched on it, as well as the demand side of things. While the crisis continues to evolve, in Australia we must be thankful for the position we're in in terms of our financial stability and markets positions, but it's right for businesses to feel uncertain and to perhaps be wary about taking on more debt. What are you thinking about at the bank and what's the bank's roles in terms of the Council of Financial Regulators? How do we get it right between encouraging access to credit and ensuring lending standards are maintained?

Well, I think what we've been saying on the small business front particularly, is that not that lending standards have been too tight, but that small businesses lack access to funding, and again, this is not unique to Australia, this is a concern globally. So there have been some of those programs put in place at the margin to try and catalyse a bit more lending, including the Australian Business Growth Fund for example.

So the other thing that ASIC has been doing is reminding the banks that when it comes to lending to a business, and a small business in particular, the banks may have been wary, how do I treat this entity, is it a business or a household, and when it's treated as a household the banks might be much more rigorous than they would be if it was a business in terms of looking for a huge amount of detailed information that they wouldn't necessarily look for if they were treating it as a business loan. ASIC has been saying for some time now, even under the existing responsible lending laws, those need not be applied to small businesses in the way they should have been applied to households.

So if we can make it clear to banks that they should be treating small businesses differently in a different frame of mind to households, then that would be ultimately a good thing. Saying that might be easier though than actually achieving it. We have to continue to monitor closely over a period of time and continue to remind everybody that, you know, small businesses are really important.

Yeah, and I think AFIA members are very much keen to see how things progress in terms of the debate around legislation, but also making sure that law regulation and data and technology can find a sweet spot in terms of making sure the process is as simple as possible for borrowers and for lenders as well.

A question about the instant asset write-off. Recently I did a podcast with Alan Oster from NAB and we were talking about the importance of private investment and business investment in the recovery, and that that needed to continue to be brought forward. A number of AFIA members have indicated that the instant asset write-off is working, but it does feel that perhaps at aggregate it could do a bit more, and it hasn't had a real, you know, sort of impact on CapEx yet. What are your thoughts about the instant asset write-off and should we be doing more in that space?

Look, I couldn't really comment on policy in such a specific way. I mean, the broader point to make about business investment is that it's usually the case that when you've had a shortfall of aggregate demand when, as you've said, savings of households have picked up significantly, consumption was hit, businesses pull their heads in on investment in very uncertain times, it's normally the case that business investment takes a while to pick up. So first we need to have households become a bit more confident to spend when they see conditions improving. That's happening. Then we need to see businesses responding also by increasing employment. That's happening and partly it's an easing of restrictions in recent case, but more generally that's the nature of recoveries. Then it's only when you've soaked up that spare capacity and employment continues to grow that businesses then feel the need and have the confidence to go and invest.

So I think that's in prospect, that's in our forecast, but it's natural that this is exactly the sort of point in a recovery where people are nervous about that, but that's why we are going to continue to provide very substantial monetary support for some time to help ensure the recovery is a sufficient one.

You mentioned productivity. The Governor has mentioned transport infrastructure as potentially being a limiter to productivity. What are the banks thinking in terms of the changes to work patterns and whether that could have an influence on the productivity, innovation, employment dynamics?

It's not my area of expertise in the bank, so I won't opine too much on this. I mean, the point that we've long been making is you want an environment where it's conducive to business investment, for all the reasons I've just stated, because stronger business investment is good for both productivity and hence, real wage growth over the longer term. It's good for all of our wellbeing and good private business investments helpful there, investment in the appropriate and broad range of infrastructure is important, but also investment in the way we do things, whether it's the competitive environment one that rewards people who take risks and try new things and innovate. So, there's a magic bullet and you can overdo any one particular thing, but there's a whole range of things we can be doing and infrastructure spending is just one of them. But infrastructure spending can take many different forms, not always just in the form of construction.

Different question. I want to take you back to your slides. You talked about non-traditional lending making up only about 2% in 2018. It will be interesting to see what the shift is in '19 and '20 and into '21. That 2% level is significantly lower than other markets, so say the US or UK and Europe. I mean, what can we do to increase the supply of non-traditional products into the SME market, which as we know if they're concerned about taking on debt in some of these more, you know, balance sheet, cashflow, unsecured products, are going to be able to satisfy SMEs who are really wanting to sort of minimise their risks by matching their liabilities and run their businesses efficiently? How can we incentivise more activity in that specialised lending space?

The one thing we often hear from our small business panellists is that sometimes those forms of finance can be suited to them, because they can provide different alternative forms of financiers with a history of their business, their revenue streams, their profitability and so on, and their sales, and then those more pivoted lenders can turn around quickly and provide finance in an efficient way in many cases. But often the complaint is, but it's still often a small amount of finance, possibly for short terms and often still expensive. So it does have a role to play and it would be good to see more growth, as long as that lending's always done prudently. At the moment, a lot of our small panellists say it suits their needs in some ways, but not in others, and price is a key one of them.

I have a question from one of our members now, which is a question about how does the bank go about forecasting the SME sector's contribution to the economy?

We don't specifically do detailed forecasts of the economy by breaking things down into either regions or industries or large and small businesses. We still, a lot of the time, rely on forecasts at a macro level. But what we often do is, we get a better understanding of how the macro economy is currently travelling by having a deep look at all of those different sectors and industries, large versus small businesses, and that's why we have a very vigorous liaison program.

So I talked about an annual small business, but every month the bank gets out through its liaison program to talk to a large number of businesses, large and small, and business associations, to try and better understand the economy and the mechanics. A lot of the time what you're doing there is saying, what's happening now, what are some of the things that are driving the outcomes we're seeing at a macro level and does that help us better forecast things. Does it say, this time round things might be different, and if ever there's been a time where that's valuable, it's a once in a hundred year pandemic where things can be different from the past, and the macroeconomic models might not do everything for you that you would like. So that's really how I think about drilling down into industries, sectors, regions, small and large businesses.

So to take that a little bit further Chris, in terms of the bank's regional liaison program, I mean, what's below the macro story that we're hearing? Are you able to share with us a little bit about what SMEs are thinking, feeling and experiencing across Australia at the moment?

Well, it's fairly consistent with some of the survey measures I talked about in that there has been an improvement in confidence, and a lot of that reflects the very positive health outcomes. There are of course some industries that are a long way from anything like a recovery, anything related to international tourism for example is still off in the distance.

But there are other industries which have bounced back faster than perhaps we expected and even they expected, and that's a very positive thing. So Australia's doing well on so many fronts, but there's still a really long way to go, and the messages in my speech have really been informed by a lot of that business liaison, and that is things are better, there's still uncertainty, and meanwhile, until we get a stronger and more enduring recovery, then the economy's going to need considerable support, and monetary policy is providing that support, and we've been very explicit that we think monetary policy will remain very stimulatory for quite some time.

So I've had a few questions about inflation and interest rates and monetary policy, so I'm going to switch to that now. So we do have ultra-low interest rates, deliberately so to encourage a surge for yield. But if that has an impact on sparking activity in certain asset markets, will the bank consider pulling back the stimulus quicker than expected?

We've addressed this in a number of different forums. My eye-level summary is that we don't think monetary policy can or should try to control asset prices. Obviously we're very aware and focused on what asset prices are doing. That's in part because of rising asset prices is an important and critical part of the transmission mechanism for monetary policy and it helps people's balance sheets.

But the bank's goals are focused very much on supporting employment growth. That in turn will lead to lower unemployment, tighter labour markets and that will support wage growth, which we need, a pick-up in wage growth in order to get inflation back and consistent with the bank's inflation target of 2 to 3%. So the bank, along with other members of the Council of Financial Regulators, they consider and will continue to consider, possible responses if lending standards were to deteriorate. So that's the critical focus. If asset prices are rising on the back of deteriorating lending standards and a rise in financial risk, that would be of concern to the Council members, and so they could consider a number of different responses. We're not at that point currently, but those responses would not be first and foremost from monetary policy. In fact, there are a lot of other avenues that they would pursue before thinking about stepping back from monetary policy.

We've been very clear, the cash rate target for the bank is a critical instrument and we've said that that will not be increased until inflation is sustainably in that 2 to 3% range. So that says nothing about our set prices.

So to take that a little bit further Chris, you know, we've seen a number of commentators talking about inflation and the views of central banks around the world, that it used to be a bit more predictable about what banks thought around the inflation side of things. We've also seen the IMF speculating about whether negative interest rates are useful. What are your views about all of this speculation in terms of, you know, as a market practitioner and as an economist? What are you thinking about internationally and domestically when you're providing advice through to the Governor on these matters?

Well there's a bit of common ground here in the central banking community globally, and what it reflects is something we've talked about before, which is we're all at or very close to the effective lower bound. I'll come back to negative rates in a minute, but we are at the effective lower bound with our policy rate. So that's a world in which a rise in inflation expectations is a helpful thing, and that's what we've seen in markets in the last few months. So that's fundamentally a good news story that markets can see a stronger recovery ahead, and more optimistic about getting a bit of inflation. Not runaway inflation by any means, just inflation that's more consistent with central bank targets.

So that's essentially a good news story, but what central banks are saying is when you have been stuck at the effective lower bound, a useful part of policy is to say, ‘Well, rather than pre-emptively tighten, let's wait until we see inflation actually consistent with our targets,’ and that's what we've said. And not the very first time it pops up there in headline terms, but to be consistent with the targets on a sustainable basis.

In terms of negative rates, we've stated quite clearly it's not under consideration here. We don't think it would be a particularly helpful thing to do in Australia, including because banks' willingness to lend might be impinged by negative rates.

I just finally note elsewhere in reference to the IMF study which references quite a bit of academic literature, but if we look elsewhere where negative rates had been used, including prior to the pandemic, those central banks that had adopted negative rates didn't become more negative or move rates down further into negative rate territory during the pandemic. So it suggests that maybe they've reached their limits or they think it would be unhelpful to do more of it.

That's an interesting observation Chris about the timing of certain policy settings.

Another question on the potential for implications for assets, so housing market and equity markets. I mean, if we are to see an attempt in terms of slowing inflation, if these areas get a little too hot, I mean, the Reserve has indicated that you'll be purchasing bonds in terms of keeping yields down, so ten year bonds, 30 year bonds even. Is that what we should be expecting to see more of?

No, well we haven't been purchasing bonds that far up that the curve. We're stopping around that ten year basket more or less. We've put in place a bond purchase program. We've not finished with that first phase and we've announced the second phase that will kick on for an additional hundred billion from April through to September and the board later this year would consider the case as to whether to do more. That's going to depend very much on economic and financial conditions at the time, as well as probably what other central banks are doing. A valuable part of what we've done through that program is help to push the Australian dollar lower than it otherwise would have been.

So should we expect that the bank will hold their bonds to maturity?

Well, that's some way off for many of the bonds. That's something we need to get into and make decisions about right now, or certainly not telegraph them publicly. The main point is we're still increasing our holdings at a reasonably good clip of a hundred billion over about a six month period. The first one, as I said, will finish in April, another hundred billion in September. So that's the thing I'd focus attention on.

I think certainly one of the actions that the bank took during the crisis, which was to expand the repo program into corporate bonds and paper, was very helpful in normalising that market at the time that that action was taken. The bank has demonstrated that you are willing to take actions to continue to normalise, so should we be expecting that if we see continued volatility or activity in markets overseas in terms of bonds, that there will be further bond activity in Australia?

Well, I should clarify what it was we did with corporate bonds. So we said we would take a wider selection of corporate bonds of sufficient rating from banks that get liquidity from us as collateral. So unlike some other central banks, we're not holding those private sector bonds outright, but we are using them for collateral and then a significant and appropriate haircut is applied to those. So that can provide a little bit more liquidity to those markets, because people know that banks will potentially desire them to hold as assets that they can come to us and get quick liquidity from if needed. But the bank hasn't considered outright holdings of private sector assets. We are focused very much on our sovereign purchases, so that's of the Australian Government Securities and then the State and semi-authority securities.

So getting further into the inflation question Chris, you know, we talked about productivity and innovation and encouraging those parts of the economy. I mean that can dampen inflation as well. What's your views on trying to strike that balance in an environment where there is continued ongoing uncertainty? What are the types of things that you look to, again as an advisor to the Governor, to make sure that you're thinking about the interconnectivity between productivity and innovation and achieving the inflation target that you're after?

The thing you have to be careful here is more productivity growth by itself might suggest more competition and lower growth of prices for example, and therefore less inflation. I don't think that's the right way of thinking about it, because more productivity is more reward for both businesses and workers, and they can take those rewards in higher profits and higher wages, and that's the point about productivity supporting real incomes over the longer term.

So I never would think about it in any sort of negative way. What it does is you look at whatever productivity is doing or you think it might do, and then you have to sort of make adjustments of whatever normal wage and normal profit growths are doing. But more productivity growth, you should see that in time, more wage growth, that's a good thing because it's also more real wage growth.

The question about data and using data effectively to inform policy settings, Dr Kennedy, the Head of the Treasury Department gave a speech talking about the importance of evidence-based policy, particularly through this period. The Governor yesterday was also talking about the importance of data and decision making. Is it time to have monthly inflation figures?

Well we're in the public domain and supporting efforts by the ABS to produce a monthly index of consumer prices to help calculate inflation, and so that's something we'd be supportive of and would encourage the ABS when they have the resources to do that effectively. So we would be supporters of that.

Excellent. I think we would be supporters of it too Chris.

Just back to the responsible lending or lending standards question, I have been asked to ask you specifically, just to be clear on your views here, do you think difficulty in accessing finance is due to interpretation of the responsible lending obligations?

Well, that's what I was alluding to in my earlier answer. I mean, responsible lending obligations, that's very much a decision for the government, and it's in front of Parliament now. What we're focused on though is, there are two things, first that lenders only really make loans that they can reasonably expect to be repaid and not place borrowers under undue financial stress, and that borrowers need to have, at the same time, sufficient access to suitable credit. So there's a balance to be struck there, and the challenge always is getting that balance exactly right.

Having said all of that, you know, there is increasing growth in lending to owner-occupiers, not so much to investors, and lending to business, as I suggested, remains weak. So our concern is we would like to see a lift in that lending in time, including to businesses, because that will be consistent with businesses feeling like doing more investment, more innovation, and that would be a good thing to see.

But you know, APRA's prudential standards provide very similar protections to responsible lending obligations, making sure the banks lend responsibly.

Chris, a question about the GFC (global financial crisis), and you can answer this as a personal or professional question, what were the lessons of the GFC that have been brought into this latest crisis, and what do you think the next crisis is going to require from us because of the lessons we've learnt from this one?

Well, I won't speculate about the next crisis or problem. I mean, the Deputy Governor gave a extensive and interesting look on his experiences. He was very much at the coalface during the GFC in the bank. My observation from that relates partly to what I've already spoken about: central banks have recognised that they've got their policy rates at the effective lower bound, and therefore an important thing is probably to provide forward guidance, which we're doing. To be very clear about that, we have been with saying we're not going to increase other the cash rate until we see inflation sustainably in that 2 to 3% range. That's a very important way that central banks can support the economy, and ultimately generate more wage growth and more inflation.

So we've been very clear about that, that's one of the lessons that we learnt by central banks that ran up first against the effective lower bound en masse, not us, by many others, at the time of the GFC

So I think some unfair commentary about the whole circumstance of this crisis has been that it was a black swan event and there wasn't a lot of preparation. From my sense, Chris, I do have a background of having lived through the GFC on different sides of the table in terms of government regulators and industry, and know the amount of preparation that's been done to make sure that we keep the system going, whether that was pandemic related and in fact there were specific plans about pandemic preparedness, but more generally dealing with crisis.

Do you think that this was a black swan event, or do you think that humans have had the capacity to be able to face into this and there was actually some pretty good plans in place ready to deal with things? I might put a few words in your mouth. I mean, the fact that there were announcements made in March and that the industry was coming together in January of last year, talking about and being prepared for what would happen to the system, I think it says that we were prepared for this, even if it wasn't COVID-19 as the actual acronym for what we were dealing with. But in your sense, do you think it was black swan, or do you think that there was a lot more preparation?

Well, one hopes it's a rare thing, but the point I would focus on, rather than defining if it was a black swan or not, and in many people's book it would be, but the more important thing would be - can you still hear me? It's telling me I might have connection issues.

Keep talking. You're good. I'll let you know if you go silent.

The point I was going to make is we weren't unique in this, but one of a few countries that really demonstrated considerable flexibility and speed in dealing with all sorts of elements in what was really, first and foremost, a health crisis, but at risk of certainly a financial crisis and an economic crisis, and Australia did very well responding on all of those fronts by being quick to think about it, coming up with some innovative things, being bold and trying some new things.

Of course, it's been a terrible year, including for businesses, but also many people who have lost their jobs and lost incomes, but all in all I would say that the thing that we had was a very responsive, not just policymakers in the public sector, and not just at the Federal or the State level, but also in the private sector. Australians I think showed great fortitude, but also a willingness to be very flexible and innovative in finding solutions for the difficulties and just getting on with things, and we're seeing the effects of that with the economy bouncing back faster than most, including us expected.

And look, Chris, I think what the Reserve Bank has demonstrated is is that you have changed tack in terms of, you know, leaning into asset bubbles and dealing with the crisis in terms of what was required now, and taking lessons from the past.

So my last question for you, because we're going to run out of time, but it is a question that's come through from a member, in 30 seconds or less Chris, what keeps you up at night?

Not a lot. Yeah, I usually have a pretty tiring day. Have a good rest most evenings.

All right, I'll let you get away with that. You've been very generous with your thoughts, so thank you very much Chris. We've covered a lot of ground, you know, inflation targets and monetary policy and assets bubbles I think are going to continue to be on the minds of many of us throughout this year.

But back to the core of what you were talking about, which was SMEs and support for SME finance and the importance of ensuring that that continues, I mean, the banks certainly have demonstrated that they're the shock absorbers of the crisis and all lenders will be [pistons 0:38:06] of recovery. So I think AFIA members are very keen to make sure they continue to be part of that support for the SME market. So thank you for your time today Chris. Really appreciate it.

There is a poll that's just popped up on the screen for our participants to please fill out. We're very interested in your thoughts. Just a reminder as well, that we do have our DDO masterclass on the 30th of March, so please register for that. We know that a number of members have been keen to continue the conversation around the design and distribution obligations, which come into effect on the 5th of October this year, and we are being told very clearly from the regulator, ASIC, that we need to be compliant. So that will be an important session for our members.

So look, thank you very much again for your time today Chris. A lot of good, strong messages there for us, but also the takeout for me is that we do need to continue to work together to make sure that we're using our markets and using SMEs as part of the recovery in Australia. It's going to continue to be important. While we might want to point the finger at the larger companies to pull their weight as well, we certainly know that the size of the SME market in Australia is considerable and they are a big part of our recovery.

So look, thanks everyone. I hope you have a good day Chris, and everybody else, enjoy the rest of your day. Thanks.

Thanks very much. Thanks everybody. Bye bye.

Bye.