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Tuesday, 25 March 2014
Page: 2047

Senator EGGLESTON (Western Australia) (21:56): In 2012 the Senate Economics References Committee conducted an inquiry into the post-GFC banking sector in Australia. That inquiry heard a substantial amount of evidence from mum and dad investors across Australia who had become confused by Bankwest calling in their loans and putting them into receivership when the market value of their properties had not reduced. As part of the evidence, many of these Australians, who owned valuable properties, consistently and repeatedly provided examples of how those same assets were devalued and sold by the Commonwealth Bank and Bankwest for what they said was 'no apparent reason'. Such forced sales, known as 'fire sales' in the industry, caused witnesses a great deal of anguish and financial hardship. Many were left bankrupt, others were made destitute and some were mentally broken.

What makes this conduct seemingly inexplicable is the fact that many of these customers had not missed any mortgage payments, were not in any financial difficulty and were otherwise commercially viable. They had met all their obligations to the bank and met them in a timely way in most cases. For example, at the 2012 inquiry the committee heard testimony from everyday Bankwest customers such as Mr Guy Goldrick, whose viable residential development project was given 24 hours to repay $6.4 million. The committee also heard from Bankwest customer and hotelier, Mr Sean Butler, who, despite record profits, lost his family's wealth after being charged over $1 million in receivership fees. There is also the story of Mr Rory O'Brien, who was given 36 hours to repay $178 million from his luxury apartment development project, which was in fact completed and had already over $100 million in sales when it was put into receivership. It is hard to understand why a bank would put a development into receivership when it was already finished. Mr O'Brien's project was valued by the bank at $255 million and was eventually sold at the fire sale price of just $56 million—a mere 20 per cent of its previous $255 million bank valuation. All of his $100 million in sales were terminated.

Mr O'Brien has already had a significant law-changing victory over the Commonwealth Bank. In April last year the Supreme Court of New South Wales ruled that the bank's use of so-called suspension clauses—a clause in a loan contract suspending a customer's right to sue the bank—is unlawful when there is evidence of unconscionable, deceptive or misleading conduct by the bank. The actions of the Commonwealth Bank, as owners of Bankwest, in foreclosing on so many clients seemed incomprehensible on the face of it. However, recently an individual who has been a victim of forced foreclosure sale suggested that the capital provisions of the Basel accord banking rules seem to provide an explanation for the behaviour of CBA and Bankwest.

The Basel accord of capital adequacy sets out a staged, gradual increase in the quality and amount of capital held by banks in proportion to risk weighted assets or RWAs in order to maintain prudential standards. Failure to meet these standards has consequences for a bank's access to capital and ultimately their profit margin. If the incorporation of Bankwest's capital and risk-weighted assets put downward pressure on CBA's Basel ratio then, it was put to me, it would be in the Commonwealth Bank's commercial interests to remove certain customers from the balance sheet rather than risk a drop in the Basel ratio. Such a drop would decrease the CBA's profitability across all products through an increase in capital costs, among other things.

One could imagine that if the CBA was targeting the removal of products with high capital holding costs then commercial loans would be a logical choice, along with margin loans, as they are a higher risk than residential loans. It is interesting to note that Storm Financial customers were similarly aggressively defaulted without the issuing of a margin call by CBA on 9 January 2009—a mere three weeks after the Bankwest takeover by the Commonwealth Bank.

In the interests of balance, I have to say that CBA has repeatedly denied that it was able to further reduce the price paid for Bankwest after the purchase by impairing loans, known as a 'clawback'. In fact, at the 2012 Senate inquiry my colleague Senator John Williams asked of the bank's general counsel, Mr David Cohen:

So there was no clawback? You are saying there was no reason to go and make loans look bad?

To which Mr Cohen replied:

Absolutely none.

Furthermore, at the 2012 inquiry Senator Williams asked:

Just going back to the takeover of Bankwest, Mr Cohen, what did you pay for it—$2.1 billion, was it?

To which Mr Cohen replied:


It now appears that this may not have been an entirely accurate answer, as the CBA did not pay $2.1 billion for Bankwest; rather, it paid $2.1 billion for Bankwest and St Andrews Insurance, combined.

The same individual who provided the information in relation to the Basel accord also advanced the view that CBA paid $63 million for St Andrews, which means that the actual payment for Bankwest was $2.037 billion, not $2.1 billion, as Australians and the Senate economics committee were led to believe. While this may seem a small discrepancy its potential impact may have been significant. Page 223 of the 2009 Commonwealth Bank annual report states that the CBA valued Bankwest at $3.676 billion as at 19 December 2008, the date of purchase of the bank. If we subtract the actual amount paid by Commonwealth Bank from the actual value of Bankwest we get an apparent discount of $1.639 billion. The question then arises as to why the Commonwealth Bank received such a price discount when Mr Cohen stated that the actual total of 'acquired provisions' for impaired loans was $630 million.

On page 30 of the Bankwest 2008 annual report is a section labelled 'Gross Loans and Advances to Customers—Impaired', showing a total value of $1.639 billion. That was the figure that was mentioned as the discount given for the bank. It would seem a reasonable inference that this $1.639 billion is not a coincidence. If it is true that the CBA got a price reduction exactly equal to the gross value of impaired loans in 2008 then this means CBA paid zero cents in the dollar for those impaired loans. This was clearly a massively significant motive to impair loans knowing that the losses would be passed onto British taxpayers through the British government's bailout of Bankwest's distressed parent company HBOS.

This then poses the next question as to why a bank would want to force customers into default when these businesses were otherwise commercially viable even in the midst of the global financial crisis. A plausible scenario may be that Bankwest and the CBA had separate motivations. Bankwest was effectively insolvent due to the failure of its parent company HBOS, leaving Bankwest unable to honour its financial obligations to its business customers.

On 30 September 2008, ABC News reported the then Managing Director of Bankwest, Mr Simon Walsh, as saying:

We're highly capitalised, we're highly liquid and with that customers' funds are safe with Bankwest.

However, as we all know, Bankwest failed. The reason for the failure was confirmed at the 2012 Senate Economics References Committee inquiry when Senator Williams questioned Mr Rob De Luca, Bankwest's managing director, about the health of Bankwest's parent company HBOS. Senator Williams said:

It went broke. I would call that serious trouble. Would you agree that they were in serious trouble?

Mr De Luca replied, 'Yes.'

It has been suggested by one of those impacted that the solution to Bankwest's insolvency was to default their customers before they found out. It has been brought to my attention that CBA's motivations for aggressively manufacturing defaults on customers may lie in the Basel accord framework. It was announced by the Commonwealth Bank during the 2008 period that the bank had progressed to the Basel II advanced approach accreditation and was also applying for a US Federal Reserve holding status, both of which require a greater capital burden. We know of course that simultaneously during this time there was a global financial crisis.

The APRA prudential standard 110 defines the Basel ratio formula as capital divided by risk weighted assets. If a bank is engaging in a strategy which requires a greater capital requirement during a time where capital markets are turbulent then the only option left to them is to reduce risk-weighted assets. A court could conclude the CBA had a predetermined outcome it needed to achieve and it opportunistically capitalised on Bankwest's dire financial situation by manufacturing defaults on certain customers to engineer the result that it wanted.

Mr Cohen previously wrote to the Senate, on 4 July 2013, stating that these allegations of induced defaults on performing customers are 'conspiracy claims'. Yet, a few months later in the UK, the Tomlinson report was released after an investigation into identical allegations that the Royal Bank of Scotland engaged in exactly the same conduct of inducing defaults on performing business loans to the benefit of the bank. This so-called conspiracy, which Mr Cohen flatly denied was an explanation, was actually happening in the UK at the same time it was impacting on mum and dad investors in Australia.

However, documents put to me by a person who was affected by the Bankwest collapse led me to believe that a further inquiry needs to consider this matter. It is suggested there was in fact a clawback price reduction mechanism. The clawback was not in the form of money being returned to CBA; rather, it was in the form of a $302 million offset against $328 million withheld funds from the purchase consideration of $2.428 billion. The purchase consideration was stated on page 4 of the 2008 HBOS annual report and confirmed on page 47 of the 2009 CBA mid-year report. It said:

(1)    That despite Mr Cohen's statement that the price adjustment mechanism was designed to achieve a 'zero-sum' outcome CBA did in fact receive a $1.639b upfront discount based on Gross Impaired Loans, some of which CBA had … influenced. This meant CBA paid ZERO cents in the dollar for impaired loans;

(2) Quite simply CBA, with the incentive referred to previously, improperly and aggressively impaired loans which would not have otherwise been impaired by Bankwest, and;

(3) That given the imperatives of the Basel Accord referred to previously it was very much in CBA's interests to … impair otherwise viable loans. This had a two-fold benefit whereby CBA could:

a. Meet its Basel requirements; and

b. Clawback the loans off the purchase consideration of $2.4b to HBOS as well as receive benefits from the loans already impaired by Bankwest because of the inability to meet their customer loan obligations.

From this it seems apparent that there was a potential commercial advantage to the Commonwealth Bank in foreclosing on Bankwest clients.

The fact that CBA and Bankwest appear to have so easily been able to misuse the provisions within their credit contracts for non-monetary defaults raises the question of whether there is an urgent need to address the severe imbalance between the power of banks and the rights of small businesses to whom they have lent money. The implications of this conduct are profoundly serious and it has been suggested that the matter can only be resolved by establishing a public inquiry to establish the facts as to whether or not the foreclosures on Bankwest clients were driven by Basel accord requirements and whether investors need greater legislative protection.