OPINION -- Climbing out of the GFC

Founder and managing director

FirstMac

The past two years have been very eventful.

We have seen major international banks collapse, government bail-out packages, and economy after economy slide towards recession. Fortunately, we are starting to see signs of strength in the Australian economy.

But unlike our dramatic downturn, upswings don’t happen overnight. An economy can take months or even years to fully regain its strength and resilience.

Yes, we are on the road to recovery, but we are certainly not there yet. So while I can’t say when the economy will return to normal, I can say it will happen, just as it has done in every previous downturn.

For many Australians, this is their first economic downturn. So what lies ahead?

There are a lot of things we can learn from the global financial crisis. Just as we learnt not to place our money and investments in junk bonds after the 1980s economic crash, we have used this economic downturn to understand the vulnerability of our securitisation market and our reliance on our overseas counterparts.

Looking overseas, we have seen a lot of international banks close under the pressure. Luckily for us, the Australian banking system is far more stable than our overseas equivalents.

That said, we have still been significantly affected by the events of the GFC. We have witnessed the demise of the smaller lender.

Over the past 24 months, competition has slowly disintegrated until there is now basically none to speak of.

The various government initiatives only served to support the position and dominance of the majors, leaving second-tier lenders and non-banks to scramble around and pick up their leftovers.

This ultimately forced many smaller players out of the market place.

Non-bank lenders such as Wizard and RAMS have either disappeared or been taken over. Even ‘we’ll keep ‘em honest Aussie John’ has taken refuge in the bosom of one of the big four.

Similarly, second tier lenders such as St George and Bankwest have been swallowed by Westpac and CBA respectively.

However, the smaller lenders that did survive have come out the other end, arguably, better for the experience.

The non-bank lenders that wanted to survive had to learn how to be resourceful.

As such, they set about targeting niche markets that the majors deem ‘too risky’.

Non-bank lenders have always played an important role in the mortgage market.

They are widely considered by the industry to be innovators, as they were the first to offer low doc loans and target investors.

But the financial crisis has made non-bank lenders largely uncompetitive in pricing, forcing them to look at other competitive avenues.

Some non-bank lenders tried to build market share throughout the downturn. But my rule of thumb is ‘when it doesn’t make sense, it doesn’t make sense’, and it doesn’t make sense to build market share when the world is tumbling down.

The majors, on the other hand, managed to build market share easily throughout the downturn. They capitalised on customer concerns, billing themselves as trustworthy lenders.

Customers want to use a recognisable brand, which is something non-bank lenders have long struggled to overcome.

It’s tough for non-banks to get work out of the broker market, because it is easy for brokers to sell a recognisable brand to their customer.

The majors understand they have the upper hand, they know they can’t be hurt by the financial crisis.

So how do they respond? By bullying brokers. Since the onset of the financial crisis, the banks have made life more difficult for brokers.

They have systematically slashed commissions, introduced minimum volume requirements and increased their aversion to dealing with ‘risky customers’.

The banks are bullying brokers and will continue to do so until brokers make a stand and truly support other lenders.

Non-bank and second tier lenders are waiting for the economy to strengthen. They are waiting for things to return to normal. And while this won’t happen overnight, it will happen.

Will it happen in 2010 – not likely, but I do think we will see an improvement come 2011.

Non-banks just have to hold in there and realise that every storm cloud has a silver lining.