So, the Commonwealth Bank can afford to shell out $2.1 billion buying BankWest and boast about carrying “substantial surplus capital“, but the nation’s biggest home lender can’t pass on the full 100 basis point cut in official interest rates.
Whilst it is true that Australia’s $900 billion home loan market relies on about $200 billion from the offshore securitisation markets, the Commonwealth Bank is in the best position of all given it dominates the deposits market.
Indeed, many billions have flooded into the CBA over recent months due to this “flight to quality”. After BankWest is swallowed, it will have 33.6% of the deposits market and 22.5% of the home loan market.
When Wayne Swan defends the CBA for not passing on interest rate cuts, he should remember that federal taxpayers sold 100% of the bank in three tranches between 1991 and 1996 for an average of about $8 a share, raising $8 billion in total.
Now the bank is doing its biggest ever cash equity raising to generate $2 billion through a selective placement of shares to institutions which will probably be priced at about $40 a share. Throw in almost $25 in fully franked dividend payments since 1992 and investors have enjoyed profits of more than 1000%, all of which has come from leading the charge to deliver the world’s most expensive banking system for long suffering Australian consumers.
Whilst the Big Four should be allowed to mop up weaker competitors or departing foreign players during these unprecedented times, the regulators should return with vigour once the dust has settled.
Countries such as Germany and Switzerland are not enjoying the experience of having dominant players such as Deutsche Bank and UBS which are too big to fail, given gross assets are close to national GDP.
Banks are meant to facilitate financial transactions as a clearing house that links lenders and borrowers. Clearly, the global industry lost a bit of focus on this core utility-like role during the great credit bubble.
After the Great Depression, the US introduced that Glass-Steagall Act which, amongst other things, banned banks from investing in other financial companies to try and control speculation and keep them focused on the main game.
Bill Clinton repealed it in 1999 in one of the great regulatory follies of our time.
The financial conglomerates that emerged blew up the global system in their greed, creating a stack of institutions that were too complicated to regulate and too big to fail, as chaos unleashed by Lehman Brothers demonstrated.
Westpac and the Commonwealth Bank have become dangerously large, so maybe the government should explore a “back to basics” approach.
Australia already has the world’s most concentrated financial system where the Big Four banks also control a majority of the funds management industry. Indeed, the HBOS St Andrews wealth management business will lift CBA’s funds under management to $187 billion.
The Rudd Government could do worse than introducing a version of Glass-Steagall Down Under that forced banks out of the funds management business given the obvious conflicts between allocating debt and equity in an economy.
*Listen to the wonderful harp in the background during this hard-hitting credit crunch discussion with Michael Smith on 4BC last night.
I don’t it is reasonable to criticise a bank for seeking to remain profitable. While I don’t personally agree with the practise, it is perfectly reasonable in our current system.
Turnbull’s declaration that the banks are ripping people off by not passing on the cut is a little disengenuous. If CBA throws their profit margin out to make customers happy, they will be doing a dis-service to their shareholders, who are also Australians, and many of them small shareholders at that. So who is more important? The people who invested in the financial security of the country by buying shares with no guaranteed earnings or the people who bought a house from those proceeds?
This issue is not as cut and dry as it is being presented in the press. There is no right or wrong and is a value judgement between home-buyers and shareholders. I suspect that if you are rigourously applying the laws of capitalism the shareholders must be the winners. But if you’re going for votes, why not pander to the larger number?
The repeal of the Glass-Steagall Act was in no sense a regulatory folly perpetuated by an ill informed President Clinton. Glass-Steagall was a post 1930s depression measure which merely prevented commercial banks from undertaking securities issuance business, and prevented investment banks from providing payment services, taking Government guaranteed banking deposits, and making “bank” loans.
None of the US commercial banks which have failed in the last year have failed because, following the repeal of Glass-Steagall, they diversified into securities issuance. They failed because their traditional mortgage and other lending was to customers who now cannot repay. None of the investment banks which have failed in the last year – such as Lehman- failed because, following the repeal of Glass Steagall, they took advantage of the repeal and diversified into the more closely regulated commercial banking domain.
There is indeed a very long-standing regulatory folly in the regulation of US investment banks, but the repeal of Glass-Steagall Act merely continued the folly. Under Glass Steagall, investment banks sought to circumvent the separation of commercial banking from securities issuance. They created quasi-commercial banking operations and these were largely unregulated, except as regards a very short term trading horizon. With the repeal of Glass Steagall in 1999, these quasi-commercial banking operations within investment banks continued apace and still remained largely unregulated, particularly as to capital adequacy requirements.
This explains why, following Clinton’s repeal of Glass-Steagall in 1999, none of the free standing Wall Street so called investment banks chose to set up more closely regulated commercial banking subsidiaries. Hopefully the simplistic claim that the repeal of Glass-Steagall is a causal factor in the recent failures of US investment and commercial banks will not morph into urban myth.
Robert Townsend
Melbourne
I don’t think it is reasonable to criticise a bank for seeking to remain profitable. While I don’t personally agree with the practise, it is perfectly sensible in our current system.
Turnbull’s declaration that the banks are ripping people off by not passing on the cut is a little disengenuous. If CBA throws their profit margin out to make customers happy, they will be doing a dis-service to their shareholders, who are also Australians, and many of them small shareholders at that. So who is more important? The people who invested in the financial security of the country by buying shares with no guaranteed earnings or the people who bought a house from those proceeds?
This issue is not as cut and dry as it is being presented in the press. There is no right or wrong and is a value judgement between home-buyers and shareholders. I suspect that if you are rigourously applying the laws of capitalism the shareholders must be the winners. But if you’re going for votes, why not pander to the larger number?
I generally agree with your views in the article Stephen but did you come up with the heading? It seems a bit sensationalist (I subscribe to crikey so i dont have to read the herald-sun) and I don’t agree with it. CBA and the ‘Big Four’ are not particuarly profitable compared to many other large comanies in terms of return on equity, it over-simplyfying to say they rip off customers.