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ECONOMICS REFERENCES COMMITTEE
12/04/2010
Access of small business to finance

CHAIR —Welcome. Would you like to make an opening statement? I note that you do not have a submission, but would you like to make some general comments about the issue of finance to small business to set the scene from your point of view.

Mr Chapman —Thank you for the opportunity. I am not sure that we really do want to make an opening submission. From our perspective, we do not see that the banks are treating small business differently from how they are treating other clients.

CHAIR —You do or do not?

Mr Chapman —We do not. We are happy to answer questions.

CHAIR —There has been a bit of discussion about whether or not small business is being treated differently. We were told by the Australian Bankers’ Association that they regard loans of under $2 million as being for small business, but obviously normal banking assessments apply to loans to small business. But there is a perception in the community that in fact small business is finding it difficult to raise money. Would you like to comment on why that perception might exist?

Mr Johnson —I think there are two dimensions to that. One is the demand for credit, particularly after the GFC. Having gone through a period of economic stress like we had, from the evidence available to us, businesses as a whole had less demand for credit. The large end of town, for example, was raising equity and deleveraging, and the smaller end had a fall-off in their approaches to the banks and other lenders for loans.

On the supply side, after something like the global financial crisis, the increase in arrears rates and non-performing loans, the authorised deposit-taking institutions and other lenders actually tightened up their lending terms, as would be expected after something like the global financial crisis. The ADIs did things like reducing the maximum loan they would give to particular classes of borrower, they lowered maximum loan to valuation ratios, had higher interest coverage ratios—those sorts of things—to tighten up their terms, with more stringent covenants, and hence there was a drop-off in the available supply. From that point of view, there were two elements—a demand impact and a supply impact. I do not really know which one dominated.

CHAIR —The background to that is that it was perhaps too easy to get credit prior to the GFC. That seems to be a view that people accept, that the provision of credit was easy and lax. What we are seeing is what might be expected to be a predictable reaction, with banks being more careful about their assessment of loans.

Mr Johnson —I think that is a fair characterisation. Prior to the GFC the spreads on lending were probably the lowest they had been for the statistics that had been collected. There had been 15 years of economic good times, and non-performing loans were at historical lows. I think there was a movement towards lending perhaps without the risk based pricing that should have really been there just prior to the GFC hitting, and then there was the correction after that. Our view is that probably we will not go back to the low spreads that we saw just prior to the global financial crisis.

CHAIR —Is that of concern to you as a regulator? Is there some role that perhaps your organisation might have played in tightening up that fairly lax approach to the provision of credit?

Mr Johnson —If you look back on some of our chairman’s speeches, he was making comments about the pricing of loans. At that stage we were also bringing in Basel II and we were tightening up capital requirements on particular classes of borrowing to try to ensure that the capital was sufficient for them. We were also undertaking more on-site visits to look at the pricing of loans. I think it was an area that we were looking at. I am not just talking about the regulated entities, I am talking about the whole system.

Mr Chapman —Perhaps our more obvious area of concern in this regard about the underpricing was in the mortgage market. If you go back, you will see a lot of history of Dr Laker making public announcements about that as well as the on-site work that Mr Johnson is talking about. It was not a small business-only issue; it was across-the-board.

One of the things that has always struck me about all the industries we regulate is that you do get cycles. I know there were a number of people in the banking industry who were concerned about the fact that their credit assessment officers had only seen the last 10 years and were not familiar with what could go wrong. A continual part of our regulatory approach is to make sure that in some ways we act as a long-term consciousness—if you would like to put it that way—a long-term repository of knowledge about the cycles in the system, and that applies in all the industries we have.

CHAIR —Since you raised Basel II, NARGA’s submission expresses concern about Basel II regulatory capital requirements as a factor leading to higher costs for small business and causing a skewing away from business lending, as under Basel II banks have to provide a higher level of capital reserves for business loans. Some submissions have claimed that banks are or will be required to hold up to seven times the amount of capital for a small business loan than would have been required for a home loan of the same size. Is that right, and what impact is Basel II having on the availability of finance for small business?

Mr Johnson —It is feasible in certain circumstances that some loans could have quite significantly higher capital requirements and it would look, to somebody looking at the underlying security of that loan, as if they were the same. I will take a small business loan as an example—one that is secured against a residential mortgage as opposed to an owner occupier buying their house. The risk profile is quite different, as I am sure some of the submissions have indicated. The underlying default rates and arrears rates on owner occupied homes and investor lending is a lot lower than it is for small and medium sized enterprise loans that are secured against a residential mortgage. They have a far higher likelihood of what they call ‘probability of default rates’ and ‘loss given default’ than do the normal residential mortgages.

Basel II, as a whole, is intended to be risk based, so it actually ensures that the capital that is being held is commensurate with the risk of the loan, and that is whether it is a low-doc mortgage loan, an owner-occupied through to a large corporate loan that is unsecured; it differentiates the security and basically requires capital according to the underlying risk profile. By itself it is attempting to be a better way of ensuring proper capital is held for the risk faced. That may mean that you do have differences according to the sector because of the nature of the business, the risks in the business, the nature of the security and that sort of thing.

CHAIR —So you are writing in the risk factor or including the risk factor?

Mr Johnson —Yes.

CHAIR —Senator Xenophon has a supplementary question.

Senator XENOPHON —In terms of the weight of the assets that are required for a loan, do you determine that on the basis of information given to you by banks or how do you get to that particular weighting?

Mr Johnson —There are two forms of the capital regime. One is what we call standardised, which is basically for the non-model users, the smaller authorised deposit-taking institutions and banks that have not got approval to use an APRA model. We basically specify what risk weights you use. For example, if you have an SME or a corporate loan that is unsecured it would be 100 per cent risk weighted—$8 capital per $100 of loan. The larger banks have their own models, which we have accredited over a lengthy process for them to get their Basel II accreditation. Those models use historical data to determine the probability of default and loss given default, on all the various portfolios and generates a capital outcome commensurate with the risk. We have to approve that. We monitor it closely. We compare those banks with their peers. Yes, it will give potentially differential rates for the model users as opposed to the standardised users, but that reflects the fact that the more complicated models are supposed to be better at predicting the underlying risk.

Senator XENOPHON —You can understand that some small business groups say that you need a lot more equity for a loan for a small business than for a residential loan. I am not saying that you should not have more, but there is an argument that the weight given is unreasonable. Can you understand where some small business groups are coming from on that?

Mr Johnson —Yes, but you have to look at the underlying performance of those loans versus the others. Our approach, in terms of the standardised method, is meant to be conservative, because where there is not a sophisticated model with a lot of data that you can look at to track the performance you would err on the side of conservatism. But for the others it is a—

Senator XENOPHON —Sorry to interrupt, but does that mean that if we had some better information you would not need to err so much? I am not saying you are erring, but I am saying that you would have a different approach in the sense that if you had more information it may be a more nuanced approach and therefore you would not require as much equity for a small business loan, if you had that information available to you?

Mr Johnson —Any authorised deposit-taking institution that can make a sophisticated model that can pass our requirements to model the capital required for those risks would be allowed to do so.

Senator XENOPHON —But they have not to date, have they?

Mr Johnson —No.

Mr Chapman —The answer to your question is clearly, yes, we can understand small business making the case. Where we are sitting and the way that the regime works there should be higher capital required for those that are greater risk of default or, as Mr Johnson said, where there is a greater loss if there is a default. If the information we were obtaining from the advanced banks who do internal models indicated that the standardised approach is well out of the water—for example, if the model said it should be 10 per cent and the standardised approach is 20 per cent—clearly we would have to think about whether the model is right. We are not seeing that sort of disconnect in the process.

I am not sure whether you were heading down this track as well. The other element is that the models are different for each bank—for each of the model banks—because they use their own experience to produce those models; it is their own data. Westpac will use their data and NAB will use theirs. Again, one of the things we look at is the comparability across those banks. If there is a big difference—and, again, I think there are probably a couple of areas where there has been a decent amount of difference—we look at whether their underlying portfolios are actually that different. So far what we see is that they are reflecting the specific risk of their portfolios. We can argue about whether Mr Smith with his sandwich shop is in the right bucket in an individual case, but in the listed case there is nothing that shows us, at this stage, that those buckets and those requirements are well and truly out of kilter. I think that is the balancing factor that comes from having the regulatory overview of the entire sector. We do a lot of data mining through this area and we can start to see where something is well and truly out of sync with the rest.

Mr Johnson —I would like to add something with respect to those comments. One example of how we have changed things is with residential mortgage lending and the standardised versus the non-standardised loans. One is like a low-doc versus a prime loan, where the lender does all of the due diligence and valuations. We looked at the different loss rates that were coming out of the material that we got from the banks and then changed our rules to actually lower the amount of capital for the higher quality loans where they did do all the due diligence, what we call the standard versus the non-standard, and required higher capital. Where we have enough information we try to adjust our rules to differentiate for the risk.

Senator XENOPHON —Is that a model for small business perhaps?

Mr Johnson —It could be.

Senator XENOPHON —Thank you.

CHAIR —Senator Pratt.

Senator PRATT —Did you clearly say that you see this as a permanent tightening of lending based on authentic risk assessment?

Mr Johnson —When I was making the comments before it was more on the spreads not going back to where they were just prior to the crisis. The lending conditions tightened during the crisis, and there are very strong reasons for doing so. As I said, the impaired assets and arrears rates were rising. The outlook for the economy looked a lot worse, so therefore there was more likelihood that a large number of borrowers were going to experience more stressful times than they had before. From that point of view, I think the spreads will not go back to where they were. But lending conditions go through a cycle. They tighten when things get like they have been. As things improve and the outlook gets better, the loan to valuation ratios, maximum loan terms and those sorts of things will probably move back to closer to what they were.

Senator PRATT —Do you expect them to continue to loosen? That might not be the right word.

Mr Johnson —As there is more sign of the problems diminishing I think there will be a return to more normal conditions and lending terms.

Senator PRATT —Can you explain to us the link between the return to normal lending conditions based on risk and how that risk relates to the level of competition for the customer? How would you characterise that dynamic?

Mr Johnson —There are two quite separate elements there. We will see a return to more normal lending conditions. On the competition side, that really depends, I suppose, on the non-bank sectors being able to raise funds and come back into the market. But from the banking side what we have seen is that the large banks have moved in and there has been an increase in their lending as a share of small business.

Senator PRATT —Do you think there is a lack of competition or that greater competition in the sector will see lending practices change?

Mr Chapman —The issue of whether there is enough competition is not really one for APRA. In any market the more competition there is, the greater the divergence of practice. That might be the best way I could put it.

Senator PRATT —So, it is a question for you in the sense that if there is more competition and therefore people change their lending practices in order to get a slice of the market, that is clearly something you need to monitor.

Mr Chapman —Yes. That comes back to the point that I was making before about the cycles that we go through. We do not ever want to get into a situation where the banks feel that to compete with some new mega lender, whether it be a small market or whether it be Aussie Home Loans or whatever, they reduce their lending standards to a stage that actually puts the security of deposits at risk. We have not seen that happen. We have seen a lot of changes in the banking industry. But while we have been concerned with some areas, particularly with housing lending, as I said before, over a number of years; we have not seen weaknesses at a stage that fundamentally threaten the security of individual institutions. At the smaller end it is a bit more of a challenge. If you are a smaller institution a big loan can actually be something that is a real concern for us in that perspective. But they have to be right at the very small end of the spectrum.

That is just part of our ongoing work of, ‘What are your standards?’ One of the things we often do is try to get an enunciated appetite for risk from the board—loosely described as kicking the tyres by looking at credit files. A board might say, ‘We want nothing to do with rural lending’, and there is a portfolio of rural loans down the bottom. We do try to get that alignment across the institution, from the board risk appetite down to what happens.

The other one we use a lot is peer group comparisons internally, both in terms of the hard numbers and also in terms of the supervisors of different institutions talking to each other regularly and having that challenge about why you thought this about X bank, and Y bank looks similar but is being treated differently and has a different type of risk profile.

Senator PRATT —This morning we heard of anecdotal evidence that businesses who should be getting access to finance no longer can. Would you contend that that is not accurate and that, in a general sense, that would all be based against a legitimate risk assessment?

Mr Chapman —In a general sense we would contend that that is not accurate. In an individual sense we can completely understand the fact that a business owner has a different view about their business. Sometimes there will be a legitimate view that has not been recognised in bank lending criteria or lenders’ criteria. But we would contend that we do not see, from what we look at with the banks, that they have fundamentally different criteria and risk assessment processes, or that they are deliberately saying, ‘You can only go and lend $100 to any small business, so pick the Rolls Royce as opposed to the Holdens.’

Senator PRATT —If there are more small businesses complaining about lack of access to finance post global financial crisis you would argue that that is based on the fact that their business prospects post global financial crisis have not yet recovered adequately to put them in a viable situation?

Mr Chapman —No, I think that is a little bit too far. We would argue that we are comfortable that the banks have put a robust risk based system in place where they are making that assessment. If you understand the point?

Senator PRATT —Yes.

Mr Chapman —I am trying to draw a distinction specifically on the question for the Hansard record. We think the banks have taken a responsible approach to tighten their criteria based on what they have, and they are making a risk based decision. As Mr Johnson said, you can argue about whether that is too tight in an economic sense, but in terms of a risk based sense we can see an alignment there with their experience.

Senator PRATT —Once there are more players offering credit and finance, do you expect the banks will continue to make decisions on the same basis or that the criteria will loosen?

Mr Chapman —I think that is another one of the cycle and competition questions. As I said, the chances are that their risk averseness will be reduced in an environment where there is greater competition than there is at the moment. Having said that, I would also like to clarify that situation. We are not arguing there is no competition in the banking sector. It is purely that obviously if you have another outside player then the competition is increased.

Senator PRATT —Thank you.

CHAIR —Senator Bushby.

Senator BUSHBY —Thank you for coming along to assist us today. APRA’s main remit is the solvency of the ADIs, is it not?

Mr Chapman —The protection of depositors, which goes with solvency.

Senator BUSHBY —That is right; ensuring their solvency to protect depositors. We had the RBA before us this morning and they indicated that their main focus, when it comes to the financial sector, is the stability of the sector, and yours is essentially the solvency. You have said yourself that competition is not what you look at. If anybody, I presume it is the ACCC’s responsibility to ensure there is competition within the banking sector. So, competition is not really where you are coming from when you are looking at the standards that need to apply with ADIs?

Mr Chapman —Yes.

Senator BUSHBY —If there are decisions to be made that may promote solvency at the expense of competition then your preference would be for solvency rather than competition?

Mr Chapman —To those black and white questions, yes.

Senator BUSHBY —That is right. You may well have been before us when we held the inquiry into the bank guarantee.

Mr Chapman —Yes.

Senator BUSHBY —I think at that stage you indicated that, regardless of the fact that there may have been some competition collateral damage from the bank guarantees, you think that was justified because of the benefits of the bank guarantees.

Mr Chapman —Also, with that particular case, we now have financial stability as an objective of APRA as well in the legislation. But, yes, it was not the competition issue.

Senator BUSHBY —That is right. I think, to some extent, there is probably bipartisan agreement that some competition needed to be sacrificed in order to ensure that the financial sector, particularly the banking sector in Australia, continued to be both solvent and stable. Today is not the day to go into that, but there were issues about the application, how the bank guarantee was approached and some of the consequences. One of the consequences was that the bank guarantee contributed to—I am not saying it is the only reason, and I do not want to go through the details, because we have already done that—the demise of the non-ADI lending sector, which certainly had the impact of reducing competition in the lending market. Would you agree that that is the case?

Mr Chapman —Yes. There appears to now be less competition to the banks in the lending market than there otherwise was.

Senator BUSHBY —Yes. Although competition is not your area, that may well have some impact on the degree to which decisions are made by lenders to compete for business.

Mr Chapman —I think that is definitely the case. Equally I do not think that by any stretch of the imagination you could claim that the major banks act as an oligopoly at the moment. They are very fierce competitors with each other.

Senator BUSHBY —They are, but they are all competing for a certain section of the market.

Mr Chapman —The same sort of pot; that is right. The other point to recognise about this, too, is that despite the comments I was making to Senator Xenophon before about the way the models work, they are all competing on a level playing field in terms of the regulatory rules that apply to them. That is always a different issue. We can go back to Aussie Home Loans. They really shook the mortgage market up when John Symonds came in with that franchise. But they were operating under a somewhat different set of rules from the CBA, NAB, ANZ, Westpac and so on. That is one of the other things to recognise here. While there is a potentially smaller pool of providers, they are now operating all under the same discipline than might have been the case previously.

Senator BUSHBY —I understand that, but where I am trying to come through this committee is ensuring that small businesses have access to the greatest range of options to be able to finance their activities, because I think that if small businesses can get money, have a good idea and make something of it, that is a good thing for the overall economy and good for Australia. I do not argue with anything you have just said, but the fact is that in the past 18 months to two years options for small businesses, in terms of some avenues of finance, have vanished and no longer exist. There is no shortage of small businesses out there that, prior to the end of 2007, may well have gone out to a bank and said, ‘This is what I want to do. Can I have some money?’ and the bank has said, ‘You don’t meet our criteria.’ They have gone to a non-ADI, managed to get the money and then made a real go of their business. That option, to a large extent, no longer exists. I will just change tack slightly. You talked about demand and supply and you noted that the demand for credit has fallen during the crisis. You mentioned that the crisis, itself, would have had direct impacts on the decisions by small businesses as to whether to go out and seek money. Do you think that the higher criteria that have been applied by banks since then, in terms of some of their lending criteria, would have also put off some applicants for finance that might otherwise have applied, and that may have flown through into the level of demand?

Mr Johnson —Yes. The tighter criteria would have definitely removed some that may have got loans prior to the crisis, and that just reflects, as I said, the banks’ experience with their arrears rates, non-performing loans for those sorts of classes of business.

Senator BUSHBY —Does it reflect an ability of the banks post the economic downturn or even during it to pick and choose a little bit more as to what they might accept as opposed to an absolute criteria that reflects what might otherwise be a sound application?

Mr Johnson —I am not really sure I could answer that. They have their criteria and they do allow exceptions around them if there are other things that are not taken directly into account in their policy. They do have certain cut-off points for things, but they can go through that if there is another issue that they think can cover for that risk. But I do not think I can really answer specifically.

Senator BUSHBY —Once again, my concern is that there are businesses out there who in other times may well have been able to obtain finance for a business venture or to expand a business venture that would normally present as a good option, and probably would make a good go of it, but who might not be able to get the money, whereas two or three years ago they may well have been able to and actually may have been able to make a good go of it.

Mr Chapman —I know I have said the ‘cycle’ word a few times today, but we have to be a bit careful about assuming that the normal times were the times three years ago. There might well be businesses now that are getting funded that would not have been funded 10 years ago; 10 years ago the criteria might have been quite different. I am just making the point that I think the answer clearly is, yes. Business that might have got funding for whatever their new venture was—

Senator BUSHBY —I am not just talking about an absolute, business that might have got funding. I am talking about business that might have got funding that could demonstrate, to a reasonable degree, that they could make a real go of what they wanted the funding for. I have no doubt that three years ago there were businesses getting funding for ventures that were fairly risky and maybe even through the banks but more so through the non-ADIs, and who arguably possibly should not have received that funding. I also think there were probably businesses three years ago that were getting funding for what were good projects that might not now, despite the fact that they are—

Mr Chapman —I am not disputing that at all. I am saying that if you go back to a different environment 10 years or so ago even the people who had business plans that we now think might be viable might not have been getting funded anyway. If you take the three-year spectrum, the answer to your question is clearly, yes.

Senator BUSHBY —I can remember that in the early eighties it was very difficult for business to get funding on all sorts of terms. We have certainly matured a long way. We have a system that has worked very well and taken us well through the global financial problems. Once again, I come back to the point that I want to see small businesses that have good ideas, with a good business case to go off and make a dollar, employ people and help the economy go around, actually get their funding. Do you see there is any role for APRA in the regulation of non-ADIs in terms of how they approach funding?

Mr Chapman —The short answer is no. The longer answer is that one of the real challenges is what we would then be regulating. In the ADI world we have a settled regime. The standards of the ADIs have been accepted worldwide and so on. What would we be doing if we were regulating a non-ADI? What is the promise that we are protecting? What is the solvency test? How is it done? There are a lot of difficulties with the whole process.

Senator BUSHBY —There are a lot of questions there, but most of those could be answered by sitting down and working through it. There could be a role for some sort of prudential regulation of non-ADIs, if they get into the lending market. It is a matter where government can sit down and decide it can regulate if it is actually going to provide an advantage, which may well be greater competition.

Mr Chapman —If the parliament changes the remit of APRA, we would need to look at what skills we would need to do other things. Do we think our current regime could be extended to a non-ADI? No. APRA was formed from a combination of agencies and we changed the way we did things internally to make sure we could regulate all the industries we now have. If the government made a decision to change our remit, we would have to look at what we needed to do to fit that in.

Senator XENOPHON —I have one supplementary question.

CHAIR —Senator Xenophon.

Senator XENOPHON —In other jurisdictions, in terms of similar organisations to APRA, do they have a broader remit in terms of looking at the non-ADI-type institutions? You may wish to take that on notice.

Mr Johnson —With most regulators like APRA in other countries it is really the deposit-takers. As Mr Chapman said, the focus is on protecting the depositors.

Senator BUSHBY —Other countries actually do not have a separate prudential regulation authority either, do they?

Mr Johnson —A lot do.

Senator BUSHBY —The US does not.

Mr Johnson —The US does not, but a lot of the others do.

Senator BUSHBY —We mentioned Basel II. Are any of the outcomes of Basel II likely to impose regulation that will actually limit or potentially limit availability of finance, or raise the cost of finance to small business?

Mr Johnson —When you say Basel II, do you mean the existing one or some of the changes being proposed?

Senator BUSHBY —I was going to say ‘existing’. I will go to some of the international negotiations with my next question.

Mr Johnson —No, the only thing with the existing approach is, as I said before, that we are constantly looking at the results of the models and the like for the model user banks. We have debates with them as to the capital charges that should be associated with particular types of lending and whether it is appropriate. But I do not think that would have a material impact.

Senator BUSHBY —What about the discussions that are currently occurring with respect to future changes, which are coming out of the consequences of the global financial crisis, and looking to put in place regulation to prevent similar outcomes in future. We have had discussions on this in Senate estimates before, that is, that some things may not be as relevant in Australia, because we already had a well regulated system and did not suffer the same consequences. Are there issues that are being discussed that may well play out in Australia and which could actually impact on the cost of finance, particularly for small businesses and the availability?

Mr Johnson —The chairman and Wayne Byres spoke last week at a conference and basically said that the expectation is there will be higher capital charges and higher costs coming from the changes proposed. Changes to liquidity arrangements will increase the cost of funds, and it would be expected that they would be passed on. Globally it has been decided to put higher capital requirements on a range of activities. Higher capital normally feeds through into a higher cost and, hence, higher rates. I suspect there will be.

Senator BUSHBY —From APRA’s perspective, given what we discussed initially as your remit, namely, the protection of depositors’ funds, this is all a good thing because it just creates a greater degree of protection for the depositors’ funds.

Mr Chapman —I accept that point. As I said before, while that is our primary focus; we try not to do so in a vacuum. The other point about the current round of Basel II changes proposed is, as our chairman has said previously; the real issue comes down to what the outcomes of the quantitative impact study are. We are currently going through the process of that at the moment to see what impact those proposed changes are going to have. Until we see the outcomes of that both in Australia and internationally, it is really hard to specifically answer your question. It is hard to argue that any increase in regulation does not result in increased costs to the regulated institutions. That is not always the case, because it depends on exactly what the increase is, but we are very conscious of this issue. We are also very conscious of the issue that the banks keep reminding us, that Australia did not suffer lots of the things that happened elsewhere in the world; but our banks do compete on the international market, and in some cases whether it is an APRA-imposed regulatory change or something the banks just have to do to continue to be able to compete internationally, the outcome is going to be the same. It is a question of trying to get that balance right. The specific answer I would have to go back to is the QIS and what comes out of that process.

Senator BUSHBY —My major concern on that point is, of course, that small businesses, in the context of this inquiry, will end up paying the cost of solutions to problems that Australia never had. I understand that you are trying to get that balance.

CHAIR —We will go to Senator Williams.

Senator WILLIAMS —When it came to the government guarantee for deposits for the registered ADIs did APRA request that guarantee from the government?

Mr Chapman —I think our chairman has answered that question a number of times before. To my knowledge, the answer is no, we did not request that, but I think Dr Laker has previously been recorded in a couple of the Hansards with a more fulsome description. Neither myself nor Mr Johnson was directly involved in the discussions, whereas the chairman was.

Senator WILLIAMS —Finally, I want to take you to registered ADIs. During this period when there was talk in the Senate about the underwriting of those deposits with the banks and so on, I raised the issue with Senator Conroy and Senator Sherry that in respect of those companies that were not registered ADIs, and that came under ASIC instead of the ones under APRA, no doubt this would force a withdrawal of investments in those companies and into registered ADIs. That is exactly what happened. Probitas Group in Victoria had a lot of funds reduced, and some of those companies fell over. I think the answer by the Treasurer in those days was that these companies should become registered ADIs. Taking you to that point of registered ADIs, how difficult is it for someone, say a debenture issuing company, probably based in rural or regional areas, to become a registered ADI?

Mr Chapman —When the guarantee was put in place we did dedicate another one of my general managers, like Mr Johnson, to answering those questions. We had a lot of the finance companies and a number of other players come to us to talk about that issue.

Senator WILLIAMS —Could it take up to 18 months to actually become registered ADIs?

Mr Chapman —I am not trying to avoid the question. I am just trying to answer it by explaining the sequence. They all came and talked to us. In only a very few cases did they, in our view, make a serious effort to think about the issues. I think there was an expectation they could all take their business model as they then ran and just get an ADI licence and be subject to the guarantee. Of course, it is actually a fundamentally different business model. A debenture issuer is not a deposit-taker and a debenture is not a deposit. One of the biggest challenges that a lot of those finance companies had was how they would actually restructure in order to become a deposit-taker as opposed to a debenture issuer. That restructure could take a considerable time, which is why I am trying to answer by describing the sequence.

A couple of them came back a few times to talk to us, but none of those companies, once they understood what an ADI was and its structure, really wanted to pursue the issue. This is not APRA driven thing, telling them they cannot get in. I suspect that when they thought about it and looked at what they were they decided the business model just was not capable of being changed to the extent it would need to be to be an ADI.

Senator WILLIAMS —Thank you.

CHAIR —Thank you for appearing.

[2.15 pm]