It’s early days in the third round of hearings at the Banking Royal Commission but I’d hazard this comment: the banks haven’t had to endure quite the same level of flogging they got in the previous rounds. 

That notion will probably be blown up in a shower of sparks in the coming days, but I offer you a couple of important points offered on Monday by Michael Hodge QC, the baby faced assassin who has been point man in the latest Royal Commission hearings into dodgy lending practices by the banks. 

One, he noted in his opening remarks on “Responsible lending to small businesses” that small businesses actually like the fact that there are fewer regulatory controls over that form of bank lending than there are over mortgage lending. 

The parade of case histories being paraded in front of the public is a fairly extensive horror show about what happens when things go wrong and guarantors’ homes get repossessed, and of course they tend to reflect badly on the banks. Around 87 per cent of small business loans are secured over homes so even a small percentage of dud loans could and does play out very badly in the public eye. 

Hence the painful case of Carolyn Flanagan, the frail and near-blind western Sydney resident who acted as guarantor for her daughter’s business venture that failed. Lender Westpac subsequently allowed her to keep living in her house but the public exposure of the case dominated yesterday Tuesday’s media coverage. 

That raises the issue of how many parents stand guarantor for their children, often with minimal understanding of what’s at stake, and neither the bank nor the children explain the risks fully. 

Another related statistic is that at June 30 last year there were just under 2.2 million businesses in Australia classified as small, or 97.5 per cent of all businesses.

Hodge said,  “A bank is generally subject to fewer obligations in determining the appropriateness of a business loan when compared with the making of a home loan.  That is the case even for loans to small businesses.  And that is, as we will explain, the approach that is desired by significant voices in the small business community. 

He went on to make the important point that “The concern is that to impose responsible lending obligations on banks when lending to small businesses would dry up or further dry up the provision of credit to small businesses.”

For a lawyer, that’s talking pretty clearly. He’s saying that if we tie the banks up in knots over small business lending, they will just turn the tap off.

Anyone considering the crackdown the Commissioner may recommend should bear that firmly in mind.

The other point Hodge foreshadowed, and we won’t get to it for a few days yet, was to blow up a couple of negative theories about CBA’s behaviour when it took over Bankwest in 2008 for an lowball initial figure of $2.1 billion.

Bankwest had for most of its life been the Rural and Industries Bank of Western Australia, nicknamed the “Rough and Ignorant”, so you can assume it had a patchy lending book. And once the Bank of Scotland took it over in 1995, things got worse rather than better.

The problem for Bankwest was that it could either stay in WA and get skinned by the usual boom and bust economy, or head over to the “Eastern States” and pick up all the high risk exposure that the established banks chose to ignore. 

Bankwest went east and picked up a lot of property exposure, some of which went bad in 2008. 

One of the theories about why CBA foreclosed a number of Bankwest loans following the purchase in 2008 was that such a move would allow CBA to use “clawback” provisions to reduce the $2.1 billion purchase price. 

The second theory was that CBA put dodgy looking loans into default in order to reduce its need for regulatory capital. 

Hodge gave CBA a free pass on both theories, pointing out their flaws in his submission to commissioner Ken Hayne before the cross examinations even began. 

He said that in the case of the “clawback” provisions, most of the loans it clawed back were already in default, with receivers appointed et cetera, before the relevant clawback date had occurred.

Plus, he noted, by the time the supposedly dud loans had been netted out against a number of improved loan situations, CBA ended up actually paying a bit more, some $26 million, than the originally struck price of $2.1 billion.

And he had no trouble blowing up the notion that foreclosing on loans would improve CBA’s tier 1 capital position. 

He said the theory was that CBA made a decision to do that in February but that in fact at that time CBA didn’t need to shore up its tier 1 capital, since at 7 per cent it was actually the strongest of the Big Four banks. 

Plus, he said, impairing and provisioning a bank’s loan portfolio serves to reduce, rather than improve, its tier 1 capital ratio.

However, the CBA is not quite in the clear yet. It’s going to face questioning in coming weeks over whether it acted fairly in calling in loans whose repayments, in many cases, were not in arrears.

Bearing in mind that the Bankwest purchase was in retrospect something of a  steal, the strong buying the weak for a knockdown price, and the deal added a reputed $15 billion to CBA’s market capitalisation, the bank will have a number of curly questions still to answer.