Bank Lending BFC5914
Monash Business School
Monash University
Week 9
1
Special Customers
2
Pricing Loans
3
Ethics in Bank Lending
(Monash Business School)
Bank Lending
Week 9
2 / 68
Equity As a Call Option
The equity holders have exactly the same payoff as a call option as
held by the firm with an exercise price of D
The option would be exercised when the assets of the firm is worth
more than D ; and the payoff would be the difference between the
stock value and D and otherwise the option is worthless
The equity of the firm is a call option on the assets of the firm where
the exercise price and maturity are given by the face value and the
maturity of the debt.
(Monash Business School)
Bank Lending
Week 9
3 / 68
Debt As a Put Option
At maturity :
If the asset is worth < D, one sells the asset for D using the put option
and uses that to pay back the debt, with nothing left over
If the asset is worth > D, one sells it and uses the proceeds to pay the
debt, and does not use the put option.
(Monash Business School)
Bank Lending
Week 9
4 / 68
Pricing Equity and Debt through Option Model
(Monash Business School)
Bank Lending
Week 9
5 / 68
KMV Model
Expected default frequency (EDF) is a forward-looking measure of
actual probability of default ; EDF is firm specific
KMV model is based on the structural approach to calculate EDF
(credit risk is driven by the firm value process)
Three steps to derive the actual probabilities of default :
1. Estimation of the market value and volatility of the firm’s asset
2. Calculation of the distance to default, an index measure of default risk
3. Scaling of the distance to default to actual probabilities of default
using a default database.
(Monash Business School)
Bank Lending
Week 9
6 / 68
Topic 8 : Special Customers / Pricing
Loans/ Ethics in Bank Lending
Bank Management and Financial Service, Peter Rose and Sylvia
Hudgins, 9th edition, Chapter 17
(Monash Business School)
Bank Lending
Week 9
7 / 68
Special Customers
Advances to Special Customers
The term ’builder’ covers a wide range of activities :
- Major civil engineering work, such as road building contracts and
drainage schemes
- Hospitals and schools
- Government housing schemes
- Factories and office construction
- Private housing down to small extensions
As well as lending money, the bank could be asked to provide
guarantees/bonds
- These are real liabilities since if called the amount of the
guarantee/bond might have to be advanced in addition to other
facilities.
(Monash Business School)
Bank Lending
Week 9
8 / 68
Special Customers
Advances to Builders
Always closely investigate the details of specific contracts
- Unless the customer is very experienced and successful in the
contracting business and is financially sound
- Even then the contracts should be looked at
Questions you should ask :
- Is the customer experienced in the industry and in the type of work
proposed ?
- Can reliance be placed on the borrower’s costings ?
- Does the borrower have adequate financial resources ?
- What are the details of the contract ?
- What are the factors influencing the amount required ?
- Put another way, how sensitive is the budget to its underlying
assumptions ?
(Monash Business School)
Bank Lending
Week 9
9 / 68
Special Customers
Advances to Builders
It is vital that the borrower has the capacity to complete the contract
The lender needs to look for clauses covering the following :
Fluctuations in cost
Penalties
Extension of time to permit interim payments
Retention fund
(Monash Business School)
Bank Lending
Week 9
10 / 68
Special Customers
Advances to Builders (Amount)
Calculation of minimum finance required to complete a building
contract :
- Contract Price : $118,000,000
- Time allowed for work : 9 months
- Interim Certificates : monthly
- Period of honouring Interim Certificates : 25 days
- Retentions to be at rate of : 10%
- Limit of Retention Fund $5,900,000 (5% of total contract)
- This is the amount set aside during the life of the contract to pay to
remedy any potential defects and only released once the project is
completed and certified defect free.
(Monash Business School)
Bank Lending
Week 9
11 / 68
Special Customers
Advances to Builders (Amount)
Calculation :
- Contract price $118,000,000
- Deduct estimated profit $23,600,000
- Estimated cost to builder $94,400,000
As work is to take 9 months, estimated average monthly cost is
94,400,000/9 = $10,500,000
This is a straight line approach (each month is the same, no
seasonal variation, no portion of the contract has higher relative
costs).
(Monash Business School)
Bank Lending
Week 9
12 / 68
Special Customers
Advances to Builders (Amount)
It is necessary to distinguish between cost of labour and cost of
materials
For the purpose of this example it is assumed that costs are in the
proportion of two thirds (labour) and one third (materials) (In an
exam I would tell you this)
Hence, monthly average costs :
- Labour $7,000,000
- Materials $3,500,000
TOTAL $10,500,000 per month.
(Monash Business School)
Bank Lending
Week 9
13 / 68
Special Customers
Advances to Builders (Amount)
The builder will work a month before the first certificate is issued and
therefore may have to wait a further month before payment is made,
i.e. it will be approximately two months from commencing work
before his first payment is received
During this time he will have to provide :
2 months’ wages $7,000,000 : 14,000,000
2 months’ materials $3,500,000 : 7,000,000
less one month’s credit from merchant : −3, 500, 00
Total finance required to reach stage of first payment : $17,500,000
(Monash Business School)
Bank Lending
Week 9
14 / 68
Special Customers
Advances to Builders (Amount)
At this stage the builder will receive payment for the amount of work
certified (for the first month) less 10% retention
Ignoring the profit element, therefore he will require additional finance
in subsequent months to cover the shortfall due to retentions
This position will continue until the full amount of retention fund is
held by the employer
The total cash resources required can therefore be estimated at :
- Finance to reach first payment (as above) 17,500,000
- Limit of retention fund 5,900,000
- Minimum Finance $23,400,000
(Monash Business School)
Bank Lending
Week 9
15 / 68
Special Customers
Advances to Builders (Amount)
(Monash Business School)
Bank Lending
Week 9
16 / 68
Special Customers
Advances to Builders (Amount)
By the terms of the contract the second payment, was due 25 days
after the end of the second month
- By the end of the third month, payment for the second month’s
materials become due ; third month’s materials on credit.
From the figures in the calculations :
- i.e. finance required $23,400,000
- The amount to be provided by builder $12,700,000 (ie over 50% equity
provided by the builder)
- We calculate that he would require the assistance of the bank to the
extent of $10,700,000.
(Monash Business School)
Bank Lending
Week 9
17 / 68
Special Customers
Advances to Builders (Amount)
- Provided there is satisfactory evidence that the builder will have the
$12,700,000 available, a limit of $10,700,000 might be considered and
it would be reasonable to expect to see the contract completed fairly
comfortably within this figure
Note that if the contract experiences any significant delays due to
weather, strikes, arrival of key components on time, disputes over
interim certificates etc, then a supplementary facility may be needed
This should not be provided as an upfront as it will reduce the builder’s
incentives to keep the project on track.
(Monash Business School)
Bank Lending
Week 9
18 / 68
Special Customers
Advances to Builders (Amount)
- It is important that lenders do not view the above calculation as a
simple ‘rule of thumb’ because the proportion of the total cost which
the builder should provide, and the amount of cash required will vary
considerably for different contracts (with lower risk contract increased
lending may be possible).
(Monash Business School)
Bank Lending
Week 9
19 / 68
Special Customers
Building Agreements and Contracts as Security
These can vary in format
- They initially grant the builder only a license to develop the estate’s
owner’s land usually at the builder’s expense
When part or all of the building operations have been satisfactorily
completed, the estate owner may :
- Grant to the builder on pre-arranged terms a lease or other legal
interest in the land
- Grant to an eventual purchaser, a lease or conveyance, with or without
the builder joining in the deed.
(Monash Business School)
Bank Lending
Week 9
20 / 68
Special Customers
Building Agreements and Contracts as
Security(continued)
The builder’s rights in the latter case will be restricted to receiving, in
certain circumstances, part of the consideration paid to the estate
owner
Normally no actual interest in the land will be acquired by the builder
so that a lender would not be able to look to the property as security.
(Monash Business School)
Bank Lending
Week 9
21 / 68
Special Customers
Property Advances
The property market tends to be cyclical
Periods of shortage and over-supply of types of building following each
other
These cycles can be nationwide or merely affect a particular area
Whilst a good property developer will think well ahead, it is not
uncommon for speculative developers to respond to current demand,
and to ignore the consequences of the time lag in building a property
and getting it onto the market.
(Monash Business School)
Bank Lending
Week 9
22 / 68
Special Customers
Property Advances
In periods of excess supply, rents and property values fall before
sufficient buyers/tenants are found and equilibrium is restored
When properly controlled, property lending can be both safe and
remunerative
Lenders need to be very conscious of the likely market conditions, say,
two years hence, and because of the difficulty in predicting, will
sometimes give property lending a lower priority than lending to more
stable businesses.
(Monash Business School)
Bank Lending
Week 9
23 / 68
Special Customers
Property Advances
There are two main types of property lending :
Property investment. Lending is provided to purchase an existing
property, with repayment coming from the rental income of the
property
Property development. This is, in effect, bridging finance for the
borrower to purchase and develop land or property, with repayment
coming from the sale of the property.
(Monash Business School)
Bank Lending
Week 9
24 / 68
Special Customers
Property Investment
When a borrower bids on an attractive investment opportunity in a
property, the objectives could include :
Income yield,
Capital gain potential,
A combination of the two
The lender will not want the covering of the servicing costs or
repayment of the advance to be dependent upon future capital
appreciation of the property.
(Monash Business School)
Bank Lending
Week 9
25 / 68
Special Customers
Property Investment
The lender’s assessment will concentrate on the following areas :
Rental Income/Debt Service Costs
Quality of Tenants
Conditions in the Lease
Term of Leases
Nature and Quality of the Property
Security Margin
(Monash Business School)
Bank Lending
Week 9
26 / 68
Special Customers
Property Development
Lending for property development is essentially the provision of
bridging finance
There will be a number of uncertainties involved
The safety of the lending will be enhanced, the more it is possible to
eliminate these uncertainties and make the transaction a closed bridge.
The key elements in an ideal property development transaction are :
- The land will be available as security with detailed planning permission
having been obtained
- Fixed price building contract with a builder who is reputable and
financially sound.
(Monash Business School)
Bank Lending
Week 9
27 / 68
Special Customers
Property Development (continued)
The key elements in an ideal property development transaction are :
- Drawdown of the lending against certificates from a recognised
architect or quantity surveyor
- The borrower having the capacity to meet interest as it falls due so
that it does not have to be added to the loan
- Repayment from a reliable source, dependent only on the building work
being satisfactorily completed.
(Monash Business School)
Bank Lending
Week 9
28 / 68
Special Customers
Property Development
There are other items to consider in property development
The following are some of the concerns the lender is required to
evaluate :
Nature of the security
Building contract
Drawdown
Covering interest
Source of repayment
Limited recourse property projects.
(Monash Business School)
Bank Lending
Week 9
29 / 68
Pricing Loans
Pricing Loans
The purpose of this section is to :
(i) Explore the different methods used today to price business loans
(ii) Evaluate the strengths and weaknesses of these methods
(Monash Business School)
Bank Lending
Week 9
30 / 68
Pricing Loans
Brief History of Business Lending
Commercial and industrial loans represented the earliest form of
lending that banks carried out. Oldest bank
- Loans extended to ship owners, mining operators, goods manufacturers,
and property owners dominated bankers’ loan portfolios for centuries
In the late 19th and early 20th centuries new competitors, particularly
finance companies, life and property/casualty insurance firms, and
some thrift institutions, entered the business lending field.
(Monash Business School)
Bank Lending
Week 9
31 / 68
Pricing Loans
Pricing Business Loans
Cost-Plus Pricing Models
Price Leadership Pricing Models
Below Prime Market Pricing
Loans Bearing Maximum Interest Rates
Customer Profitability Analysis
(Monash Business School)
Bank Lending
Week 9
32 / 68
Pricing Loans
Cost-Plus Loan Pricing
One of the most difficult tasks in lending is deciding how to price a
loan
Lender wants to charge a high enough interest rate to ensure each loan
will be profitable and compensate the lending institution for the risks
involved
(Monash Business School)
Bank Lending
Week 9
33 / 68
Pricing Loans
Cost-Plus Pricing Issues
Requires identification of the marginal cost of funds
- This is not as easy as a text book makes it look !
- Some banks simply use the market price of the most immediately
available market product of the relevant maturity
- Non fund operating costs are in the aggregate easy to observe (all non
interest expenses)
- However, not all of these costs are attributable to the lending function
(e.g. trading rooms, cheque processing, some proportion of the CEO’s
time etc)
The problems associated with this method led to the prime rate
approach.
(Monash Business School)
Bank Lending
Week 9
34 / 68
Pricing Loans
Price Leadership Model
Price Leadership Model
Also called the prime rate approach or reference rate approach
(Monash Business School)
Bank Lending
Week 9
35 / 68
Pricing Loans
Price Leadership Model
Price Leadership Model
The lender categorises the borrower into risk categories after loan
evaluation
Each risk category will translate into a particular risk premium ; Lenders
will differ as to the degree of flexibility they allow in this process.
Bank may chose to vary their loan volumes by changing their mark ups
for risk
Some lenders will use a mark-up based on simply adding a percent
rate that reflects perceived risk ; Others will use a multiplicative
factor.
(Monash Business School)
Bank Lending
Week 9
36 / 68
Pricing Loans
Price Leadership Model
Prime Rate
Major Banks in the US established a Base Lending Fee During the
Great Depression
At that time it was the lowest interest rate charged to their most credit
worthy customers for short-term working capital loans
In Australia this rate tends to track (follow) the 90 day Bank Bill Rate,
but changes less frequently than the 90d BB
Other longer term prime rates or base rates are available as well, in
which case the term premium will be reflected there
The prime rate usually reflects the cost of funds plus the relevant
administrative costs and the relevant return to shareholders.
(Monash Business School)
Bank Lending
Week 9
37 / 68
Pricing Loans
Price Leadership Model
LIBOR
Leading commercial lenders have switched to LIBOR-based loan
pricing due to the growing use of Eurocurrencies as a source of
loanable funds
LIBOR-based loan rate = LIBOR + Default-risk premium + Profit
margin
The London Interbank Offer Rate (LIBOR)
The rate offered on Short-Term Eurodollar deposits with maturities
ranging from a few days to a few months.
Note that there has been a recent scandal with a group of banks acting
to manipulate the reported benchmark rates to obtain advantages in
derivatives settlement
http ://en.wikipedia.org/wiki/Libor scandal
(Monash Business School)
Bank Lending
Week 9
38 / 68
Pricing Loans
Price Leadership Model
LIBOR
The LIBOR rate is the most commonly used benchmark for
international loans and bond issues, many banks now use LIBOR
instead of their prime rate
Most loans are issues at an interest rate of LIBOR +
The loan contracts do in many cases allow for the margin over LIBOR
to be subject to review on both a cyclical basis as well as if certain
events (e.g. credit rating downgrade) occur.
(Monash Business School)
Bank Lending
Week 9
39 / 68
Pricing Loans
Below-Prime Market Pricing
Below-Prime Market Pricing
The ongoing evolution of the financial market place meant that
market reference rates became more popular (and these are generally
below the prime rate)
Loans to smaller businesses typically use a prime rate approach, while
larger loans and loans to large firms typically use a market based
reference rate
- This reflects the reality that larger firms often have the option of going
to the funds markets directly
(Monash Business School)
Bank Lending
Week 9
40 / 68
Pricing Loans
Below-Prime Market Pricing
Cap Rate Model
Banks Offer a Floating Rate Loan with an agreed upon upper limit on
the loan contract regardless of the course of future interest rates
Typically banks manage the risks associated with this type of product
with an option over a swap.
(Monash Business School)
Bank Lending
Week 9
41 / 68
Pricing Loans
Calculating the Return on a Loan
The Contractually Promised Return on a Loan
Contractually Promised Return on a Loan is the return that the bank
realizes if the loan does not default
Factors affecting the promised loan return :
Loan interest rate,
Fees,
Credit risk premium,
Collateral,
Non-price terms such as compensating balances
Loan rate = base lending rate (BR) + credit risk premium or
margin (m)
(Monash Business School)
Bank Lending
Week 9
42 / 68
Pricing Loans
Calculating the Return on a Loan
The Contractually Promised Return on a Loan
Direct and indirect fees and charges :
Loan origination fee (f),
Compensating balance requirements (b) : a fraction of the loan
principal required to be held in demand deposits at the bank
Reserve requirement (R)
Base Rate (BR)
Gross return on loan (k) per dollar lent :
1+k =1+
(Monash Business School)
[f + (BR + m)]
[1 − b(1 − R)]
Bank Lending
Week 9
43 / 68
Pricing Loans
Calculating the Return on a Loan
Customer Profitability Analysis
Estimate Total Revenues From Loans and Other Services
- Note that loan customers may provide other sources of revenues such
as funds under management, payroll processing income etc, as well as
loan fees
Estimate Total Expenses From Providing Net Loanable Funds
These can be tricky to cleanly estimate and may result in simple rules
of thumb being applied, e.g. a percent margin. This can underestimate
the costs of servicing ’high maintenance’ customers
Estimate Net Loanable Funds The amount of funds leant less any
ongoing deposits maintained by the client
Estimate Before Tax Rate of Return By Dividing Revenues Less
Expenses By Net Loanable Funds.
(Monash Business School)
Bank Lending
Week 9
44 / 68
Ethics in Bank Lending
Ethics
Role of this section : To understand some of the ethical dilemmas
that a banker may face
How do you know when you are
Ethically challenged ?
What to do ?
How are you indoctrinated into the cultural perspective of the bank you
were with ?
Who would you be inclined to follow / take advice from ? Ethics can
reflect cultural issues
There are some general principles that all societies will agree on (do
not kill), but in other situations cultural norms can generate very
different answers (e.g. can I bribe a public official ?)
(Monash Business School)
Bank Lending
Week 9
45 / 68
Ethics in Bank Lending
Why Should One Care About Ethics ?
Sustainability
Ethical behavior builds trust and future rewards
Builds teams and leadership based on excellence
Higher moral standard than regulations or laws
Reputation and conscience
Who are you working for :
- Stakeholders or shareholders ?
- Bruner, R.F. (2005) ’Ethics in Finance’, Darden Business Publishing
(Monash Business School)
Bank Lending
Week 9
46 / 68
Ethics in Bank Lending
What Is More Important ?
Should SHV(shareholder value) come at the expense of morals ?
Is moral behavior the same as ’legal’ behavior ?
Should practices in your home country be same as operations in
another country ?
- What if bribery is an acceptable practice in another nation ?
(Monash Business School)
Bank Lending
Week 9
47 / 68
Ethics in Bank Lending
Questions to ask (Nash, 1981)
Have I understood the problem correctly ?
If I stood on the other side of the problem how would I define it ?
To whom am I loyal ?
What is my intention with this decision ?
Can my decision injure someone ? Whom ?
Can the counterparties be engaged in this decision ?
How will I feel explaining this to my friends, boss, family friends, in
the future ?
- Nash, L.L. (1981) ’Ethics without sermon’, Harvard Business Review,
November-December : 79-90
(Monash Business School)
Bank Lending
Week 9
48 / 68
Ethics in Bank Lending
Why Do The Ethical Practices of Banks Matter ?
Huge impact across the community
Depositors may not be agree with investments made
Debts to poorest nations
- Should a bank write off such debt or continue to charge interest ?
Lending to arms trade / embargoed nations / tobacco /money
laundering
Lending to dictatorial regimes
Environmental issues
Support for the community
However, not all will agree with the lender as to its definition of
socially acceptable
- A code must be developed and the bank prepared to explain its point
of view
(Monash Business School)
Bank Lending
Week 9
49 / 68
Ethics in Bank Lending
Ethics Questions For Bank Lenders
Should I deny loans to decaying urban areas with large numbers of
minorities (red-lining) ?
- On average such loans are more likely to default
- However, is racism part of the problem ? (minority loan applicants are
more likely to be rejected)
Some of the difference is due to lower creditworthiness, but studies
have found that non-white applicants with satisfactory (or above)
credit characteristics are more likely to be rejected
How should I deal with conflicts of interest between my personal
and professional life ?
The best practice is to move any loan assessment from individuals
where there is a conflict of interest to another loan assessor.
(Monash Business School)
Bank Lending
Week 9
50 / 68
Ethics in Bank Lending
Privacy & Confidentiality
Employees of bank have access to large amounts of information that
are commercial in confidence or private.
- This can include financials details of celebrities as well as details of
future plans of listed companies
Such information cannot be disclosed or discussed outside of the
relevant professional circumstances
- E.g. you cannot use this information to trade shares [or to help
someone else trade] or for purposes of gossip
- Criminal prosecutions can result from both types of activities
(Monash Business School)
Bank Lending
Week 9
51 / 68
Ethics in Bank Lending
Proceeds of Crime and Tax Evasion
In many nations (including Australia) banks are required to report to
the relevant authorities any transactions which are deemed
suspicious (large amounts of cash, possible tax evasion, proceeds of
crime etc.)
As seen by the Commonwealth bank case the failure to follow these
requirements can have enormous adverse outcomes
- In the case of the CBA the upper limit for the fine could well be close
to $1 trillion : over 53,000 breaches with an $18 million fine per breach
- Even if the transaction is below the required reporting limit repeated
cash transactions of a suspicious nature have to be reported.
(Monash Business School)
Bank Lending
Week 9
52 / 68
Ethics in Bank Lending
Equator Principles
The Equator Principles is a risk management framework
Leading international banks agreed to follow guidelines to promote
sustainable development in project finance
- In April 2018, 92 adopting financial institutions in 37 countries have
officially adopted the Equator Principles, covering the majority of
international Project Finance debt in emerging and developed markets.
NGOs had questioned bank’s behaviour in projects affecting the
environment
World Bank’s IFC, International Finance Corporation set up guidelines
http : //www .equator − principles.com
(Monash Business School)
Bank Lending
Week 9
53 / 68
Ethics in Bank Lending
BankTrack
The mission of BankTrack is to promote fundamental changes in the
operations of banks so that, while conducting their business in a fully
transparent and accountable manner, they contribute to the
ecological wellbeing of the planet and to offering a decent life free of
poverty for all people (http : //www .banktrack.org /
show /pages/about banktrack)
E.g : The Paris pledge to no longer finance coal projects :
- http : //dotheparispledge.org /#page = the paris pledge
&petition = individual&bankorder = ranking
(Monash Business School)
Bank Lending
Week 9
54 / 68
Ethics in Bank Lending
Predatory Lending
Predatory Lending is defined as : any lending practice that imposes
unfair or abusive loan terms on a borrower.
It is also any practice that convinces a borrower to accept unfair terms
through deceptive, coercive, exploitative or unscrupulous actions for a
loan that a borrower doesn’t need, doesn’t want or can’t afford
Source : https ://www.debt.org/credit/predatory-lending/
(Monash Business School)
Bank Lending
Week 9
55 / 68
Ethics in Bank Lending
Warning Signs Of Predatory Lending
Interest rates that seem too good to be true : these can often be
’teaser rates’ suddenly no longer available or subject to increases at
a later date (An issue before the GFC)
Pressure to act quickly (Always a warning sign)
The product start to look complex or risky
They ask you to lie on your application
The interest rate or fee structure starts changing from what you
thought or changes just before settlement
(Monash Business School)
Bank Lending
Week 9
56 / 68
Ethics in Bank Lending
Predatory Lending in Australia
There have been some problems with predatory lenders in Australia
However the practice is considered not widespread, with only 0.56%
of Australian households affected (more likely involving loan brokers,
but not always)
- https ://www.ratedetective.com.au/articles/home-loans/predatorylending-australia-117/
There were some controversies involving loans written in Australia but
denominated in Swiss Francs in the 1980s which caused a Federal
Inquiry and changes to the relevant laws
- http ://fistfulofeuros.net/afoe/10640/
(Monash Business School)
Bank Lending
Week 9
57 / 68
Ethics in Bank Lending
Predatory Lending in Australia
Controversies remain with respect to the level of credit card interest
rates in Australia
- https ://www.choice.com.au/about-us/mediareleases/2016/may/federal-governments-banking-reforms-to-creditcards
There have been several government inquiries into the issue, and
increased consumer protection legislation, but the level of interest
rates have not been reduced
- http ://www.afr.com/news/credit-card-market-no-less-competitivetreasury-finds-20150712-giac9o
(Monash Business School)
Bank Lending
Week 9
58 / 68
Ethics in Bank Lending
The Ethics of Loan Affordability
Many bank customers lack the relevant financial expertise and rely
on the banks to determine how much they should borrow
- This was also an issue in the Swiss Franc loan cases in the 1980s as
well as during the GFC
Under Australian law the banks have an obligation to ensure that
they do not impose potential financial hardship on their client by
lending too much (The National Credit Act of 2010)
- As illustrated by the GFC, lending too much is also poor business
(Monash Business School)
Bank Lending
Week 9
59 / 68
Ethics in Bank Lending
The National Credit Act
By law the credit provider must :
- Make reasonable inquiries about your financial situation, requirements
and objectives
- Take reasonable steps to verify your financial situation
- Decide whether the credit contract you are asking for is ’not
unsuitable’ for you
- https ://www.moneysmart.gov.au/borrowing-and-credit/consumercredit-regulation
(Monash Business School)
Bank Lending
Week 9
60 / 68
Ethics in Bank Lending
Responsible Lending
Lending should consider the circumstances of the borrower :
A general rule of thumb is that mortgage payments should not exceed
30-33% of gross income (25% is better)
More dependents should result in a lower borrowing capacity
There should be some allowance for increases in interest rates and a
cash reserve for unanticipated events
The use and availability of credit cards should be factored into
borrowing capacity calculations.
(Monash Business School)
Bank Lending
Week 9
61 / 68
Ethics in Bank Lending
Some Examples of Bank Ethics Statements
Ethical investment selection : the Mutual Bank will not invest in
fossil fuels and has no plans to do so.
Economical and responsible lending : The Mutual Bank is
committed to customers’ financial wellbeing and employs conservative
lending practices to ensure customers are not putting themselves in
financial hardship. Practical advice and guidance helps customers
select the most affordable loans suited to their personal situation.The
Mutual Bank is also committed to providing sustainable options
within its product range which includes green options for lending
products.
https : //www .victeach.com.au/about − us/latest − news/2016 −
ethical − investment
(Monash Business School)
Bank Lending
Week 9
62 / 68
Ethics in Bank Lending
Codes of Conduct
Westpac/Bank of Melbourne has a comprehensive code of conduct :
https ://www.bankofmelbourne.com.au/content/dam/bom
/downloads/overview/Principles for doing business.pdf
3.5 Responsible lending
We believe in responsible lending practice. We are therefore committed
to :
3.5.1
3.5.2
3.5.2
3.5.2
-
lending only what our customers can afford to repay ;
marketing our products and services responsibly ;
supporting customers facing financial difficulty ; and
helping to improve our stakeholders’ financial literacy and capability.
The Westpac Group’s Principles for Responsible Lending is available at
www.westpac.com.au
(Monash Business School)
Bank Lending
Week 9
63 / 68
Ethics in Bank Lending
Lending to Low Income Borrowers Who Cannot Repay Is
Unethical
Some controversy associated with this
Failure to access finance traps low income individuals in a low income
cycle (you need investment funds to increase your income)
Some argue that banks just disqualify all low income borrowers
The GFC illustrated that lending too much to unqualified borrowers
will worsen financial hardship
The problem is setting a balance between these competing objectives ;
you will not get universal agreement on this issue
- http ://www.finweb.com/banking-credit/what-is-ethicalbanking.html#axzz4fzF29VyJ
(Monash Business School)
Bank Lending
Week 9
64 / 68
Ethics in Bank Lending
The Public Relations Nightmare
A day of shame for Commonwealth Bank : Several ”BankWest
victims” related to a joint parliamentary committee the destruction
of their businesses and lives at the hands of our biggest bank
Read more : http ://www.theage.com.au/business/comment-andanalysis/cba-threw-its-customers-under-the-bus-20151116gl0411.html#ixzz3xfG9ftPE
(Monash Business School)
Bank Lending
Week 9
65 / 68
Ethics in Bank Lending
The Other Side
NAB and Teachers Mutual named amongst the world’s most ethical
banks
https ://www.finsia.com/news/news-article/2015/03/16/nabteachers-mutual-named-among-worlds-most-ethical-companies
(Monash Business School)
Bank Lending
Week 9
66 / 68
Ethics in Bank Lending
A Final Point
Ethical lending does not mean abandoning profits
- http ://www.finweb.com/banking-credit/what-is-ethicalbanking.html#axzz4fzF29VyJ
Unprofitable banks will mean bank failures and extensive financial
hardship and social distress
(Monash Business School)
Bank Lending
Week 9
67 / 68
Ethics in Bank Lending
Lecture Recording
Lectures are recorded and available online.
Copyright
(2022). NOT FOR RESALE. All materials
produced for this course of study are reproduced under Part VB
of the Copyright Act 1968, or with permission of the copyright
owner or under terms of database agreements. These materials
are protected by copyright. Monash students are permitted to use
these materials for personal study and research only. Use of these
materials for any other purposes, including copying or resale,
without express permission of the copyright owner, may infringe
copyright. The copyright owner may take action against you for
infringement.
©
(Monash Business School)
Bank Lending
Week 9
68 / 68