The IMF delivered a ringing endorsement overnight to Joe Hockey’s campaign for an overhaul of banking regulation.
Contrary to a nonsensical report from AAP, which claimed the Fund had “slapped down” Hockey, the IMF’s latest report on Australia addresses some of the exact issues Hockey has been raising.
“Given the relatively good performance of banks in the face of the crisis, staff expressed concern that they may be emboldened to take on riskier strategies. The global crisis highlighted the need for banks to hold strong capital and liquidity buffers and for supervisors to encourage banks to carefully manage their risks.”
That’s about as blunt a summation of Hockey’s position on the need to rein in banks’ desire to become growth stocks as you can get. And the Fund repeats it later in the document: “Banks remain sound but the authorities should remain vigilant as banks could adopt riskier strategies.”
The Fund also stresses an issue Hockey dwelt on last Monday in his AIG speech, when he discussed the “mismatch between short-term deposits and the three to five-year wholesale debt that banks primarily use to fund their credit creation activities, and the much longer term — up to 25 year — loans they extend to their customers, which gives rise to the liquidity and solvency risks that necessitate an underlying system of public support for all banks.”
“Disruptions in global capital markets could put significant pressure on Australian banks because of their short-term offshore funding,” the Fund warned, going on to say “staff advised that APRA encourage banks to rely more on medium and long-term funding.”
The Fund comments — reflecting extensive input from Treasury — show how absurd the jibes of ‘populism’ directed at Hockey are. These are mainstream concerns, backed by key regulators, respected economists and even some industry players.
Mike Smith of ANZ went further than populism, though, comparing Hockey to Huge Chavez and reaching for that badly-overused lament of “sovereign risk” — a term that now appears to mean any example of a politician failing to tug the forelock sufficiently to large corporations. Smith deliberately set out to intimidate a politician who had dared to step outside the bank-manufactured consensus about financial regulation.
ANZ is directly in Hockey’s firing line. It is less than a month since chairman John Morschel boasted that ANZ was a “growth stock” because of its “supra-regional strategy” in Asia: “Otherwise we would have become a yield stock and if that happens your share price can suffer.”
ANZ’s “supra-regional strategy” in pursuit of being a “growth stock” — exactly the sort of “riskier strategy” the IMF is talking about — is underwritten by a lack of competition in domestic lending, shameless fee gouging and a de facto government guarantee, based on the simple reality that ANZ, along with the other members of the banking cartel, is too big to be allowed to fail. As the IMF noted, we saw that in action during the GFC, despite our financial regulatory system supposedly being based on the principle that no part of the financial sector is guaranteed.
This isn’t just about a banking oligopoly making super-profits by gouging customers and jacking up interest rates more than their borrowing costs warrant. This is about increasing the exposure to risk of entities that, unlike most of corporate Australia, are simply too systemically important to be allowed to fail. That’s what the critics accusing Hockey of populism and “out there proposals” don’t understand — or, much more likely, understand perfectly well but find it convenient to ignore.
For Smith, the stakes are high — his remuneration is linked to making ANZ a “growth stock”. But for the Australia economy, the stakes if (or, based on the overseas experiences of other Australian banks, when) ANZ gets it wrong are far higher. Smith’s comments, by the way, are at odds even with the Australian Bankers’ Association, which rejected Hockey’s call for ACCC powers to investigate collusive price signalling but declared the rest of Hockey’s agenda was worthy of consideration.
The only success Hockey has had so far is in the launch of a Senate inquiry. Senate inquiries won’t do anything unless they’re backed by the government — and particularly not if it focuses on annoying but systemically trivial issues like ATM fees. Wayne Swan’s continuing refusal to take Hockey’s proposals seriously is a staggering example of either partisan politicking at its basest or industry capture, or perhaps both. That it is coming from a Labor Treasurer is all the more remarkable.
The important part of the IMF message was the advice that banks should “rely more on medium and long-term funding”. That costs more than overnight money, Bernard. That is why there is growing pressure on interest margins.
ANZ’s Asian expansion might be able to tap cheap deposits as that part of the world is full of savers, not spenders.
While Hockey has been going about this like a “bull in a china shop”, Mike Smith’s remarks yesterday were entirely inappropriate for a CEO…both Joe and Mike are “overplaying their hands” right now.
Less political posturing would improve the debate.
Bernard, you have finally convinced me, you are not up to the task sunshine. I won’t be renewing my subscription. I expect Crikey’s political analysis to be rigorous and I see little else for which to pay the tab. When you weigh into a political shit-storm like this one you had better know what your talking about. I see little evidence of this in your blathering over Hockey’s plan for a ‘social compact’ . If you believe this is a seriously thought out policy to fix our banking sector you are smoking something. Perhaps you could get a job as Joe’s spin meister. You have backed yourself into an intellectual bog with this one and frenzied digging only makes you sink faster. Good luck and good night.
Money makes the world go around… etc. But when a democracy finds itself having effectively lost control of the value of its citizen’s efforts to a small group of companies obliged only to maximise the return to their shareholders, then something fundamental needs changing. As Jessica Irvine notes in today’s Sydney Morning Herald, in reference to John Quiggin’s recent book on Zombie Economics, in the face of having just wiped $4 trillion off the world economy, the big end of town is still attempting to peddle the “infinite rationality” and purity of the free market. Let’s be honest – this is about greed, plain and simple and the bare-faced temerity of Mike Smith (all he needs is a top hat and a cigar to completely look the part) to admonish a people’s representative (my local representative, by the way) for in any way suggesting Big Money needs looking it smacks of someone completely disconnected from reality. I am ashamed the Government can’t bring itself to start acting the way they promised and join the discussion, choosing instead to launch cheap shots at Hockey while assuring the Banksters they have nothing to worry about. Hockey’s ideas are probably not the best I’ve ever heard, but at least he’s raising an issue others, especially on the other side are shying away from.
I don’t think this is any different from other Public/Private endeavors such as Health, Education, Transport. We (i.e. the Government) should provide ourselves a basic, universally-available infrastructure to which every citizen has right of access, and then allow, nay encourage, the private sector to provide whatever they choose to on top of that universal base. Uncontrolled private interests inevitably become a destructive element in society, in exactly the same way uncontrolled governments do. As recently demonstrated, we have an effective way of controlling our government representatives. Now we just need a way of ensuring large private interests are made to act constructively within the environment we provide for them.
As an aside, the Labor Party has become bereft of principles and spine and those to whom these ideals are important are moving (sometimes reluctantly) to the Greens.
ANZ’s Asian strategy is to tap the savings in Asia and funneling them to Australia. They can do enough risky lending in Australia already 😛 While enumeration concerns may factor into it, Mike Smith is hired by ANZ because he’s an expert on Asian banking, therefore it’s a given that he wants to expand in Asia.
Some kind of ‘financial firewall’ should be established between banks operating in different financial jurisdiction, or Australian taxpayers will end up with a huge mess from a “rogue operator in Asia”.
Managing the mismatch between short term deposits and long term lending is the reason why banks exists. The business of banking relies on setting different interest rates on loans and savings. When the Government starts to dictate the interest rate margins, they might as well be nationalized. This is why you see such venomous reaction from the bank’s CEO. It is a direct attack on the essence of banking.
The suggestion that bank should only use ‘long term funding’ is pure humbug. What matters is the period when the loans rollover, and they should not all happen at once. The only way to eliminate collusion between the big four is to introduce more competition. Unfortunately, mortgage backed security retains a toxic stench due to the GFC, and without them competition cannot exist.