This session is part of a number of sessions on Finance for Pensioners and solutions to the Housing and Rental Crisis in Australia
Which business borrows the most ?
Banks
If you want to set up a bank you need some money to start the business.
It is called the Capital Adequacy Ratio. In Australia it is 8% which means you need 8% in funds before you can borrow 92% from the public. The borrowing is in the form of fixed deposits and money in customer’s bank accounts.
In financial terms the Loan to Valuation Ratio (LVR) is 92%
Imagine that you want to set up a business similar to a bank and you go to your bank and say:
I have $800 in the bank and want to borrow $92,000
What are you going to do with the money
I am going to lend to other people and charge 2% more than what you are charging me
Do you have any security like property or so
I have $8,000
Do you think the bank will approve the loan
Not very likely but that is exactly what banks do
They put up a limited amount of money and then borrow the rest from you
Are the banks safe?
If 8% of the people want their term deposits back, the bank is bankrupt.
But the government steps in and says we must subsidise this dangerous business and guarantee some of the funds. We do not want banks to go bankrupt because that is bad for the economy , so let’s subsidise them so they can make more profits. We will also set up Australian Prudential Regulation Authority (APRA) to make sure that the banks only provide safe loans and that deposits are safe.
Any profit the banks make is multiplied 12 ½ times. So if the bank makes 1% profit they actually make 12 ½% profit on their own money.
A normal margin between deposit and lending rates is 2% so if you put your money in a term deposit or bank account the bank makes 25% on your money and you are lucky if you get 5% ( or nothing in your trading account)
Profitable business ?. I think so
I recently wanted to borrow some money from the bank to build affordable rental accommodation for people who are struggling and approached the bank manager
Hi, things are a bit difficult for you at present as you are getting a bit of flack from the public about the enormous profits you are making while we are struggling with the cost of living.
I know, we are putting out some extra advertising to point out that we are a Community Bank and always put the interest of our customers first and also point out that we are supervised by APRA
Who is APRA
APRA is the Australian Prudential Regulation Authority set up by the Government to make sure the Banks are doing the right things for their customers and also make bank accounts and bank deposits safe.
I came here to see if I could borrow funds to build some affordable rental accommodation for people that desperately need it
We are regulated by APRA to make sure that all our loans are safe. We can for instance give no funding for, development, infrastructure , community projects or charities because we need full security, preferably good property in capital cities and we cannot take out a mortgage over a road or a community project and charities do not need funding as they get plenty of tax deductable donations and run raffles.
But I thought you were a community bank . Is that not misleading and deceptive conduct
Like the Government we are not bound by the Trade Practices or Fair Trading Act and anyway who is going to sue us
Coming back to the affordable renal accommodation. Can you fund me
The other regulation that APRA has put upon is that we only provide money to customers that can show us that they have good income or have a profitable business. It is very difficult to make a profit in affordable rental accommodation so APRA has instructed us not to provide funding for affordable housing.
WE DO NOT DO AFFORDABLE HOUSING
So you do no funding at all if people want to develop housing
The opposite is true . If say a married couple, both employed in the Public Service want to develop a $1m house we are more than happy to fund that.
But I can build 4 houses for that for people that need it
I told you before APRA will not allow it and that we do not do affordable housing
You have mentioned APRA a number of time who is APRA responsible to
They are regulated by and responsible to the government under strict regulation and are audited regularly. The Bank also has regular meetings with them.
Who is funding APRA
We set aside a small part of our profits and APRA is fully funded by us.
Sorry I have another appointment and also sorry that we cannot help you
Goodby
Oh, before you go, I have noticed that you are banking with our competitor. If you want to open a bank account with us or invest in one of our safe term deposit , we are only too happy to help you