Gareth Vaughan argues banks' lending to big corporates on an unsecured basis shouldn't expect a taxpayer bailout if things turn to custard

By Gareth Vaughan

Safe as houses. It would appear that some banks have been acting under the misguided view that their loans to big corporates, many of them state owned, are just that.

But, leaving aside debate on just how safe housing loans really are and the potential for a drop in house prices, at least when banks write a residential mortgage they have the house as security should things turn to custard.

In contrast recent events, think Solid Energy and Chorus, have highlighted that bank loans to big corporates often aren't secured at all.

With my taxpayer's hat on I'm glad banks don't have security over Solid Energy assets ahead of the taxpayer. But I'm disappointed that in 2013, with the international events of 2008-09 still front of mind, at least one bank seems to believe there was an implied taxpayer guarantee in lending to a State Owned Enterprise.

I'm talking about Bank of Tokyo Mitsubishi.

This is the bank that's going to court later this month to try and prevent a rescue deal, that has been agreed to - potentially reluctantly - by ANZ, BNZ, ASB's parent Commonwealth Bank of Australia (CBA), Westpac and TSB Bank for the beleaguered Solid Energy. The deal will effectively see Bank of Tokyo-Mitsubishi take a $16.3 million haircut on its $80 million loan to the SOE, but will buy Solid Energy time, and who knows, may ultimately save the rest of the Japanese bank's exposure.

Now I'm not a lawyer. But having seen the basic reasoning behind Bank of Tokyo-Mitsubishi's case - which I reported on here - I tend to think the Crown Law advice Finance Minister Bill English disclosed, when he said Bank of Tokyo-Mitsubishi has "only a small chance of succeeding", appears sound.

Bank of Tokyo-Mitsubishi is also one of four banks with around $1 billion, combined, of unsecured loans to Chorus. The others are CBA, HSBC and Westpac Banking Group. Despite last week's Commerce Commission related default warning from Chorus, lenders to this corporate would appear to be on safer ground than those who lent to Solid Energy.

Given the political capital, and taxpayers' money, the Government has sunk into the broadband rollout, it's nigh on impossible to see the Government letting Chorus fall over - if things were to ever get to that point.

But rule 101 of lending money should be that it comes with risk. No matter how small this risk is. It would appear that at least one bank operating in the New Zealand corporate market doesn't accept this, believing should things turn to custard the Government of the day will simply throw taxpayers' money in its (the lender's) direction.

In 2013 that scenario just won't wash.

Why should taxpayers cough up so banks, seemingly lending in a carefree manner, can walk away with their loans intact when the proverbial hits the fan?

This article was first published in our email for paying subscribers. See here for more details and to subscribe.