The response of many in Australia’s banking sector to the lessons of the global financial crisis has been dangerously complacent.
Well, complacent is one word. Hubristic is another, and it was used by APRA head John Laker in late November.
The post-G20 drive toward a tighter and more consistent global financial regulatory regime flushed a lot of this complacency into the open. Australian banks didn’t need the sorts of liquidity constraints being proposed internationally, we were told by bankers, analysts and commentators. After all, they sailed through the GFC intact – albeit with more than a little assistance from the taxpayer via Government guarantees.
The banks like to point out that they paid for their guarantee, omitting to mention that was only for wholesale borrowing. The deposit guarantee comes for nix for deposits less than $1m. And two of the Big Four banks have not merely not paid for, but have benefited significantly from, the other type of government support they received during the GFC – a virtual waiver of competition policy concerns that in normal circumstances might have derailed mergers like Westpac-St George and Commonwealth-Bankwest.
Politicians have been complicit in this. Throughout 2009 there was regular sniping between the Coalition – especially Peter Costello – and the Government over which side of politics got the credit for the success of Australia’s financial regulatory system in weathering the GFC storm.
You get the basic idea – Australia had managed to develop a world’s best practice financial regulatory framework (just putting aside for a moment HIH, Westpoint, Fincorp, Storm, Opes, B&B etc) and we didn’t need any foreigners telling us to constrain our banks by imposing regulation just because they’d got it wrong.
That the Big Four banks have renewed their efforts to expand overseas in spite of both the lessons of the GFC and their own ill-fated efforts to do so in previous years suggest our banks actually believe this stuff (check out this nice piece from Ian Verrender on the weekend. NAB is sniffing around one of the icons of the GFC (for all the wrong reasons), Northern Rock in the UK, and ANZ continues to boast of its plans for Asia – a region that, as Christopher Joye has pointed out, will do very nicely as a substitute for the US in the next financial crisis.
The irony of this obsession with overseas expansion is that the very failure to expand overseas was a key factor in isolating the Big Four from much of the GFC contagion, a virtue they are apparently eager to now remedy.
As Laker’s remarks back in November suggest, our regulators aren’t buying the fairytale. But their policy task, and that of their political masters, got significantly more complicated last week when President Obama announced two major new measures aimed at US banks. The first, to be called the Volcker Rule, will prevent banks owning, investing in or sponsoring hedge funds, private equity funds or proprietary trading operations for their own profit. The second is a less clear proposal to prevent consolidation in the US financial sector through a cap on the size of institutions.
As John Quiggin shows in Crikey today, the success of the Obama proposals, especially on the Volcker Rule issue of “narrow banking”, which economists like Quiggin and Joye have been pushing for Australian action on for some time, is far from assured. And they were partly undermined by reports that Treasury Secretary Timothy Geithner was unhappy about the swing of power within the Administration’s economic policy back toward Paul Volcker, who had complained of being frozen out. Worse, a nonsensical-to-the-point-of-parody decision from right-wing appointees on the Supreme has stripped away prohibitions on US corporations funding political advertising, a decision guaranteed to make the dysfunctional US federal political system even less capable of reform.
Nevertheless, Obama made it clear that if US banks want to fight him, he’ll take them on. The subsequent plunge in US bank shares suggests (a) that the Obama proposals have real substance and (b) he will indeed get a fight, one he may struggle to win.
The significance for Australia is in Obama’s comment that he wants to undertake the reforms as part of a broader international push for further regulation. Gordon Brown’s Government was apparently caught on the hop by the Obama announcement, but quickly decided to use it to renew Brown’s push for a “Tobin tax” on transactions. The Rudd Government has made much of being not merely in the G20 but at the centre of G20 thinking of financial regulation. The Obama proposal goes in directions as yet not publicly contemplated by the Prime Minister.
At the core of the “narrow banking” issue is a simple but compelling argument (teased out in detail by Chris Joye here): if banks expect, and receive, taxpayer and regulatory support and a commitment that they won’t be allowed to fail, then there must be a quid pro quo – not for the sake of fairness, but for sound policy reasons based on moral hazard and effective allocation of public spending. That quid pro quo is that banks do not undertake higher-risk activities, whether it be hedge funds or expansion into high-growth but politically and legally-unstable jurisdictions.
At issue is not the idea that banks should not get something for nothing, but that their role as the financial arteries of the real economy – that produces real things and employs real people – is too important to be endangered by risk-taking. That importance merits protection of a kind governments do not normally provide the private sector. And it merits circumscription of risk-taking operations.
So far, the Government’s primary focus on managing risk has been via executive remuneration, rather than circumscription of activities.
The Big Four banks are acting as if we’ve had the last major financial crisis the world will ever see. Clearly that is not the case. A key policy issue for the medium term is how far the Rudd Government will go in confine banks to lower-risk activities and, if it won’t do that, how it will deal with other governments apparently bent on taking the fight to the financial sector.
The problem with the banks is that — like the Bourbon restoration after the Napoleonic regime — they remember everything, but have learnt absolutely nothing.
The Pal got put out for the banks
and it was wolfed down
they now need toilet training
and some quick lessons
heel and sit would be a good start
refusal to learn the basics is usually
fixed by a quick neutering …..
The expansion of personal debt continues unabated. One day the price of houses and real estate will adjust downwards. When that day comes the balance sheets of the banks will look decidedly shaky. We need a strategy for Australia to invest more in productive infrastructure instead of continuing to inflate the value of existing assets.
complacent is one word. Hubristic is another.. If you’re short, I could think of some others, such as insular, arrogant, venal, greedy, grasping, overpaid …
> banks are acting as if we’ve had the last major financial crisis the world will ever see. Clearly that is not the case.
It’s not even clear that the current financial crisis is over – not if the Chinese economy tanks.
PS. @j-boy57: love your work.