You can tell that the bank-bashing is starting to be taken seriously when the AFR devotes four pages, an editorial and an op-ed (from Professor Stephen King) to it.
The really on-point piece — apart from King’s excellent effort — was by Jonathan Shapiro, who explained, “Australia businesses are the main victims of higher funding costs, not home owners.”
For all the tabloid fury, talkback anger and political vitriol directed at the banks (including Wayne Swan’s splendid complaint on Tuesday that the CBA’s rate rise was particularly bad for falling on Cup Day), there are systemic issues that are at risk of being overlooked in the emphasis on home mortgage rates and infuriating bank fees.
One of them is that the collapse of non-bank competition has allowed the banking cartel — strengthened by being allowed to gobble up Bankwest and St George — to focus more on lower-risk residential mortgage lending, choking off higher-risk business lending. Small business and the construction industry — which saw some truly scary building approval figures yesterday – continue to pay the price for this. And the cartel knows perfectly well that it will attract far less outrage by punishing business borrowers with higher rates than households that actually vote.
As Michael Pascoe has noted, the higher the banks lift mortgage rates beyond the RBA’s cash rate, the less likely the RBA is to continue lifting rates, given the banks’ usurious levels of greed are doing its job for it (better yet, with the banks wearing the opprobrium instead of the RBA). But rising business lending rates, and tighter business credit, have real world effects on employment and will tip some marginal businesses over the edge. That’s where the lack of banking competition (which won’t be remedied by making it easier to switch accounts, until there are more competitors to switch to) is really hurting.
And don’t forget the banking cartel will find a way to gouge you even if you’re not a borrower. The big four have been allowed to dominate the superannuation industry as well (they have six of the 10 biggest, and several of the worst-performing, funds in the country), although they give their own employees a better deal on fees and commissions than they give the rest of us.
The other systemic problem — as King discusses — relates to risk. The cartel is currently engaged in an industry-wide demonstration of moral hazard, led by ANZ’s forays offshore. Under current regulatory settings, we’re virtually inviting systemically-important institutions to pursue higher-risk growth that may well leave taxpayers stuck with a bill in the tens of billions to bail out banks left exposed in the next financial crisis.
In short, this is about things that might not appeal as much to politicians and the mainstream media as residential mortgage rates, but which are much more important.
None of these are new issues. All of them — including switching costs — were covered in the Six Economists’ letter last year, which brought together different strands of thinking on financial regulation issues by some of the country’s finest economists, all from differing points on the political spectrum. That letter, more than a year ago, identifies exactly the issues that have now moved to the centre of political debate.
If Wayne Swan had heeded the economists’ call for a major Daughter-of-Wallis-style inquiry into financial regulation in July last year, it could now be nearing completion and Labor would have looked decidedly prescient in anticipating the problems caused by the rise and rise of the banking cartel in the wake of the GFC.
Instead, the Government rejected those calls with the same dismissive air with which it knocked back Hockey’s action plan. It may need to be less dismissive now that Hockey has announced he’ll be introducing a private member’s bill on price signalling, which is likely to be supported by the Greens and the independents — assuming the Coalition can draft it properly.
This is not a debate about “reregulation”. The banks are already heavily regulated (starting with protection from takeover via the long-standing ‘four pillars policy’). In fact banking is like a number of sectors in Australia that should properly be regarded as hybrid sectors, somewhere between free enterprise-based and government-based, because of the critical regulatory or funding role played by government. The implicit government guarantee now enjoyed by the big four banks further strengthens this mixed status for banking.
These sectors have been growing in number rather than shrinking, due mainly to the predilection of politicians of both sides for politically-motivated interventionism — think childcare and international education — but also because the tendency of Australian markets to oligopoly keeps throwing up competition challenges for politicians.
Two enduring features of these hybrid sectors are that politicians like to avoid responsibility for the decisions of private companies until they become a political issue, and they don’t realise their existing regulatory or funding settings are wrong until there’s been a major collapse.
A genuine overhaul of banking regulation — rather than just a focus on headlines about fees and higher mortgage rates — might enable us to avoid that result in banking.
Wayne Swan’s job description should be to explain to the populace in simple language that the RBA cash rate is only one of many factors which influences retail interest rates.
Instead, he has been grandstanding in a poor imitation of Peter Costello.
Swan is second rate. So is Hockey. The difference is that from Opposition, you can afford to be populist. It doesn’t come back to bite you until you are in Government.
Why can’t we have a real prime minister, a real treasurer and a real finance minister again?
There is even a much bigger problem than Bernard Keane has raised.
The big banks are so seriously exposing Australia to a financial calamity that Parliament should immediately restructure the financial system.
The calamity could arise without another Global Financial Crisis (GFC). It could arise simply from the Australia dollar dropping back to where it was a year ago some time in the future.
The looming risk is created from the banks obtaining around 40% of their total funds from overseas with 25% of it being due to be repaid within a year. Over the next three years or so all funds obtained from overseas by the banks may be refinanced with the Australian dollar at or above parity with the US dollar.
If the Australian dollar then dropped back to US$0.80 the cost of the banks refinancing their debts would increase by 25%. This would create a loss of 25% of 40% of their total funds equal to 10%. However, this would bankrupt the banks as the regulators allows them to have less than 10% of their total funds as equity.
The danger is too obvious and dangerous to waste time with an inquiry. Both the foreign borrowings and leverage of the big banks should be urgently and substantially reduced. The government should immediately purchase say at least 10% of big bank assets that are home and personal loans to voters. The credit created by this transaction would be offset by the reduction of credit provided by foreigners.
The government could then aggregate by federal electorate the bank assets purchased. The assets could then be sold on to existing and/or newly created credit unions, terminating and permanent building societies in each electorate. Bank staff could be transferred with the assets. This would create locally managed non-profit deposit and lending institutions to provide real competition to the banking oligopoly as well as insulate voters from another GFC.
“As Michael Pascoe has noted, the higher the banks lift mortgage rates beyond the RBA’s cash rate, the less likely the RBA is to continue lifting rates, given the banks’ usurious levels of greed are doing its job for it”
Childish, immature statement. The Reserve Bank sets the rates for Australia for international investment, not just for our irritating banks.
This is all too true… we have gone to the extraordinary lengths of establishing companies and bank accounts offshore in order to access banking services that are not going to cost us an arm and a leg, and gain us access to better business borrowing services in 12 months time when we will need to expand. Ridiculous, isn’t it!
Where is Paul Keating now, proudly declaring that he deregulated the banks. Yes sure, and created longer term problems down the track when economic circumstances turned sour. There seems to be some merit is Shann Turnbull’s ideas . Certainly he, like the rest of us are worried about what will happen when the second and perhaps more severe round of the GFC hits. The sagging American economy seems to indicate that it is well on its way. There have been calls for the Federal Government to revoke the banks guarantee but if there is another nasty round coming in the GFC, now would not be the time. So what to do? So many commentators keep saying consumers should switch banks but consumers don’t do that – it is too hard changing all your depositors over to a new account and you may pay too much in fees. Besides why should consumers have to switch? Why can’t they rely on their bank to provide a reasonable service? Why aren’t the banks required to engage in a social contract that requires them to consider the social impact and consequences of their actions? One of the greatest steps away from good service was the abolition of the local bank manager who knew his/her customers and their needs, who could use a certain amount of discretion for those who were struggling. It seems to me that if the Federal Government is going to continue to provide the guarantee, they need to up the quid pro quo – the banks need to be more socially responsible or face greater regulation.