Editorial: Fund could keep good firms afloat

Opinion

By far the most interesting idea to emerge from the Prime Minister's Job Summit on Friday was the proposal from within the banking industry that they and the Government establish a joint fund to help businesses that are temporarily stressed but fundamentally sound. Finance is the lifeblood of business and maintaining the supply to those temporarily stressed is normally a routine task of banks. Their appeal for the Government to join them is an admission of how difficult their task has become.

New Zealand banks remain sound, as the summit was reminded by the Reserve Bank Governor, Alan Bollard. Their exposure to the products that have poisoned international capital markets was low. But their lending to business has slowed recently, which Dr Bollard attributes to caution in borrowers as much as banks. Firms are wary of debt and not taking on more of it, unless of course they have to. And the reasons they have to are what makes them a risky proposition.

Many firms in need of operating credit will be those supplying goods or services that their customers have decided to forgo until the outlook improves. It is still anyone's guess how long this might take. The firm might run at a loss for another month, six months or a year. Its banker needs to assess the firm's prospects of survival until demand recovers and its prospects of repaying debt it would be carrying by the time conditions improve.

And the banks need to make their assessments soon. There is no point extending a firm's credit now and getting cold feet in a few months when the recession may be at its deepest point. Dr Bollard told the summit it was "completely appropriate that [banks] should be now very conservative". But he added that they had "profited from good times in this economy and we expect them to be there for the tough times too".

Their response was the joint fund proposal. The fund, built on possibly $1 billion each from the Government and the banks, would provide equity finance rather than loans to companies in temporary trouble. Equity would be cheaper for the companies and provide less security than loans in the event of failure but the fund would rank ahead of shareholders' equity in that event.

That was the deal outlined by merchant banker Rob Cameron and, as he said, the devil would be in the detail. As always the difficulty, noted by Finance Minister Bill English, is ensuring the fund does not simply relieve the banks of burdens they would otherwise have carried. It is much better for the economy that banks assess the credit-worthiness of business and carry their loans if at all possible.

The fund would need to be designed so that it was the last resort of firms in need of temporary finance, not their first and softest touch. There needs to be a built-in disincentive for banks to refer their customers to the fund too readily. Perhaps an applicant should have to take its business case to more than one bank and be recommended by both as a business deserving the fund's consideration. That would put the firm's original bankers at risk of losing a customer if the second bank assessed its prospects more favourably.

And how is the fund to assess applications? At an arm's length from the Government, proponents agree. Bank representatives would be better at filtering out firms that are unlikely to prosper in a changed environment no matter how long they have been around or how "iconic" they may be. But the fund cannot simply be a subsidy for the banking business. The interests of the economy must have an equal voice in the fund's disbursements.

Properly constituted, this could be the financial lifeline business needs in a period of extraordinary uncertainty, if only for reassurance.