We don’t need stronger banks, we need stronger regulation
|
Don’t you just love the banks? They just give and give and give. In fact, they are so generous that, according to a recent survey by The Australia Institute, more than half of Australians who do not have a job received unsolicited offers of credit cards last year. Offering money to people in their time of need, how good is that? Of course, the interest rates on credit cards are a little higher than average. In fact, they are about three times the official interest rate. But that’s fair because, as we all know, the risk to the banks of people defaulting on credit cards is higher than average. But if the risks to the banks are so high, why are they writing to unemployed people and offering them credit? If credit cards are so risky you would think the banks would be more careful about to whom they offer credit limit increases but in fact the opposite is the case. Banks love customers who are struggling to make the minimum monthly repayment as they end up paying the most in interest. They won’t admit it but they can’t stand all those customers who pay off their balance in full each month. Another thing they don’t like to admit is that credit cards aren’t actually that risky. According to the Reserve Bank’s data, credit card customer defaults only account for 1% of the total money owed. And when you consider the billions the big banks make in credit card fees from customers, retailers and smaller institutions you can see why the banks are so keen to offer more and more credit cards with bigger and bigger credit limits to almost anyone they can find. The generosity of the banks doesn’t end with offering us all those credit cards and frequent flyer points. On the contrary, in addition to helping us at a personal level they are there to help our economy as well. According to Ralph Norris, the chief executive of the Commonwealth Bank of Australia, the $6.1 billion profit he just reported was a boon for all Australians. Banks pay lots of wages you know, and they even pay tax. But, of course, the main thing they pay is dividends to their shareholders. In an attempt to soften the expected community hostility to the 41% increase in his bank’s profit Norris trumpeted the fact that his bank paid their 45,000 staff more than $4.5 billion in wages but in making this comparison he actually highlights an amazing feature of the Australian banking system. Last year 45,000 people got up each morning and worked hard for the Commonwealth Bank and at the end of the year the shareholders of the bank who had done nothing more than wait patiently for the dividend cheques earned far more than them. Of course banks need to make a profit if they are to stay in business, and of course those who have invested in banks deserve a dividend cheque. The question isn’t should banks be allowed to earn a profit, it is how much is enough? Last year banks made actual profits of about $23 billion, which translates into more than $1000 in profit for every man, woman and child in the country. While the bank reporting season isn’t finished yet, it looks like this year it might be more like $1200 per person. Is that enough? The stock market didn’t seem to think so as the share price for the Commonwealth Bank actually fell the day it announced its 41% profit increase. They were expecting more. There has been a lot of talk about the cost of living in this election campaign but there has been very little discussion of the need to regulate the banks to keep their fees and interest rate margins down. Every dollar they gouge in super profit is a dollar that comes straight out of the pockets of ordinary Australians. In their desperation to look civic minded rather than rapaciously greedy the banks have started to concoct bizarre stories about how we all benefit from high bank profits. Really? Would we all benefit if higher petrol prices helped to keep the oil companies “strong”? Would we all benefit if higher food prices helped to keep Coles and Woolworths “strong”? The plain fact is that the big banks in Australia are far too strong as it is. They have used their strength to drive out their smaller competitors. They have used their strength to charge outrageous, and possibly unlawful, fees on those who missed a payment. And they have used their strength to increase their profits to the point that the underlying profits of the banks account for about $3 out of every hundred dollars earned in Australia. We don’t need stronger banks, we need stronger regulation. And if that doesn’t work we should have a super profits tax on the banks. I can just imagine the advertising scare campaign they would run: “A bank super profits tax will hurt Australian families. Just like we do with interest rates, we will pass all of the costs straight back on to consumers. You can’t hurt us. We’re just too strong”. Dr Richard Denniss is executive director of The Australia Institute, a Canberra-based think tank |
|
|
|
24 Comments
HEAR, HEAR!! You are absolutely right Dr Denniss!
I remember the days, not too long ago now where the bank actually paid me for the privilege of looking after my money - now I have to pay them! I’m embarrassed to tell the accountant every year how much interest I earned!
Also I’m one of those people who pays off their credit card bill every month that you speak of (if I’ve used it) - that’s the only way I can have my revenge!
At the end of the day I believe it comes down to the investors, they’ve got to realise their personal greed for higher dividends every year (got to be better than last year!) is having an escalating detrimental effect on society because the more they want, the more ruthless and unscrupulous the banks (and any publicly listed organisation for that matter) become to achieve the results. It’s a never ending vicious circle forcing added stress and cost onto those at the end of the line who can least afford it.
It’s unfortunate that on many levels, people want to live in a community but they don’t want to be a part of it!
“In fact, they are about three times the official interest rate. But that’s fair because, as we all know, the risk to the banks of people defaulting on credit cards is higher than average. But if the risks to the banks are so high, why are they writing to unemployed people and offering them credit?”
The banks don’t know these people are unemployed. They don’t have access to tax information.
And Credit Cards are riskier than other loans as they are not guaranteed by an asset such as a house or car.
Dr Denniss refers to super profits - exactly what the banks make courtesy of their licences and other Government-granted privileges. (witness the way they decimated their smaller competitors during the GFC - with the help of the Government’s differential Guarantee surcharge)
Is this a veiled criticism of the MRRT, or is it a call to extend it??
And while we are on the MRRT, (sorry for the segue) am I the only one to object to the Government determining key taxation policy via discussions with 3 multinational companies?? AND is there anyone out there who has assessed the potential for punitive action to be taken by the 21 counterparty/countries who signed up to bilateral investment treaties with Australia?
The last thing the Australian economy needs in relation to banks is to give politicians or bureaucrats the power to discriminate against the banks or to try and run them better (directly or by indirect controls). That is a sure way to sub-optimal results all round.
There are four major banks which are actually competitive in many ways (e.g. NAB recently abolished one range of fees, all of them engage in different ways to cut costs which, when successful allows them to compete for example by abolishing or lowering fees or offering a better mortgage interest deal etc.) and quite a number of alternative places to lodge one’s cash, provide credit or credit cards etc. To the extent that they make quasi-monopolistic extra profit beyond the cost of capital the greatest beneficiaries are Australian taxpayers and retired people including Australian taxpayers who are relieved of the need to support self-funded retirees.
What is Theresa talking about in suggesting that a “personal greed for higher dividends” is having some noxious effect? The dividends have to be higher simply to match inflation and a bit extra to match pension indexation to average wages. Most recently, they need to be higher to make up for the cuts following the GFC - or didn’t she notice that because it doesn’t concern her that self-funded retired people might be poorer? It could, just possibly, be true in some almost fanciful case, that an employee of an institutional investor benefits from a bank meeting his forecast of a higher dividend. Ah, but then it might be the other way round. He/she forecast no increase in dividend and recommended a Sell so loses his bonus because the bank increases its dividend and its share price goes up……
Julius,
The inflation rate for this year is approximately 3%. The Commonwealth bank increased its profit by 41%. Hardly ‘matching inflation’.
Your rhetoric about the banks being competitive and cutting costs doesn’t match up with the facts. The Commonwealth Bank had a $6.1 billion profit that set a new record for a bank profits. For your claim about competitiveness to be true the banks should be seeing less profits as they return more of their savings to their customers to attract a larger market share.
The only thing that deregulation of the banks has done has been to allow anti-competitive behaviour. How ironic that we need to reintroduce regulation to encourage competivieness. Still, it won’t be done under either our current corporate lapdog Coalition or scaredy cat visionless Labor governments.
Thank you Dr Denniss, somebody finally said it. $23 billion profit! At a time when most banks are doing well to be still trading at all.
But it’s not just credit cards. Don’t forget all the government stimulus that was aimed at upward pressure on home prices and mortgage payments (although I thought the stimulus was for keeping people in jobs, but what would I know).
It’s nice to know that all those people who’ve overpayed for their homes will continue doing so for up to 30 years depending on the term of their loans. That’s billions of dollars that won’t cycle through the economy causing growth and employment (unless you count bank profits and dividends).
Estimates of Australia’s housing price bubble, brought on mainly by tax distortions, government incentives, and the stimulus, range from 20 per cent overvalued according to the IMF, up to 61 per cent overvalued according to the Economist last month.
Australia’s banks operate as a “cartel” according to GMO analyst Edward Chancellor (who called the credit crunch in 2005). “Australia is not out of the woods. It hasn’t even entered the woods.”
$23 billion profit! Who says the stimulus wasn’t money well spent and borrowed?
HOSS: “Is this a veiled criticism of the MRRT, or is it a call to extend it??”
The funny thing is that through the whole CPRS and MRRT thing, the public were accusing the government of accommodating the mining sector. Oh no it didn’t, the government went to war with the mining sector, while quietly following advice from the banks on stimulus policy and other matters. In return for favourable commentary in the financial media, which is dominated by the banks.
JULIUS: “The last thing the Australian economy needs in relation to banks is to give politicians or bureaucrats the power to discriminate against the banks or to try and run them better (directly or by indirect controls).”
Just as bad is the government’s practice of discriminating in favour of the banks. Just look at the favours done under the present government alone:
1. Deposit guarantee applied initially only to the big four. It was extended a month later to other banks, after the run on them had finished transferring most most of the fungible cash to the big four;
2. The wholesale borrowing guarantee, resulting in $157 billion of overseas borrowing today, with all the risk that implies. Investor deposits which could have replaced a portion of this much more safely, have been scared away by being the most highly taxed form of income (about 100 per cent taxed in real terms);
3. The boosted first home owners grant, resulting in higher mortgage payment income streams stretching into the future;
4. $16 billion of taxpayers money invested in residential mortgage backed securities (RMBS) through the Australian Office of Financial Management, supposedly to “support competition in residential mortgage lending from a diverse range of lenders”. (Again, what that’s got to do with employment is not made clear.)
Better to have less banks and a stronger banking system than what is happening in USA and elsewhere - real ugly.
Better get rid of Gillard and Swansong or we are really fooked
@POWERISNOTSTRENGTH
You won’t find me disagreeing with your objections to discrimination in favour of banks except as it occurs as an incidental consequence of policies or actions justified for other reasons, and then I would be critical of government failure to do no more than was necessary (consistently with my view that politicians and bureaucrats are fallible and motivated by sometimes difficult to discern or understand ideas or purposes, in partial contrast with people for whom there is a bottom line test).
The guarantees to the banks were probably necessary to stabilise the financial side of our economy. There were some (one hopes) unintended consequences because the different treatment of the majors and the minor financial institutions but there was a proper attempt to be rational in the charging of fees for the guarantees and also in the difference in fees charged according to the institutions’ respective credit ratings.
I think your point 2 is not about a discrimination in favour of banks but about a criticism of the tax system (that the Henry report appears to agree with) which the banks would benefit from having fixed.
Your point 3 involves no more than an incidental benefit from a government measure designed to achieve other ends.
Your point 4 is about an attempt to discriminate in favour of other institutions and against the big banks is it not? A clumsy attempt to right an imbalance created by the government or a measure to be judged by its stimulatory effects on the housing construction industry???
@ DAVID.BYRNES
In the language of the courts your answer to me is “non-responsive”. I referred to dividends not profit in the context of keeping up with inflation. Moreover as snapshot of a single year is of use to the discussion.
So what that one bank (or all four majors) makes “record profits”. Apart from inflation that is likely to occur for the average business in a growing economy simply by keeping up with GDP growth or population increase. As to your particular point, competition will not reduce profits in the long run except from some suitably defined previous special state of affairs; e.g. when previously there was price fixing as for stockbrokers’ brokerage rates or conveyancers’ fees. The most obvious case of bank profits being competed down would be one where the post de-regulation scenario was one where the banks started with a return on capital which was well above the risk premium adjusted cost of capital needed to keep them in the banking business. Theory predicts as the most likely scenario that all banks profits tend to an average which keeps their risk adjusted cost of capital about equal, and no higher than the cost of capital to business generally. Not stated with total precision but the point is that there is no reason why competition is going to drive profits down if each bank is finding better ways of doing things and thus competing in ways that are not confined to price competition, and even if it is confined to price competition unless profits are artificially high to start with.
Understanding that competition may take many forms it is obvious that deregulation did lead to competition where there simply had been none - largely because none was allowed.
Obviously the GFC has encouraged the banks to behave in similar ways because the same precautionary measures were the obvious ones for each of them to take. So, lending less but charging more is motivated by survival (or if that is too scary a word, security) and because each takes the same course there is less appearance of price competition - although it hasn’t stopped NAB announcing the end of penalty fees (which could probably have been defended as liquidated damages).
@ROBERTSON - Oh really? Of course, life was so just and fair for ordinary folk under Howard/Costello? Give me a break. For example, the cost of living has increased by 40% in the last 10 yrs. Over 7 of those yrs Howard/Costello were in govt. Wages certainly haven’t increased by anywhere near that amount(they went down by 5% under Howard) and I’m damned sure pensions didn’t either. In fact, Howard was the first govt in this country to tax pensioners. When I do my shopping, I pay the same GST as someone who’s even on a moderate salary, not to mention millionaires etc. I’m not talking of luxury goods & services, I’m talking about the basics - to eat, clean and take care of my self and my home/car etc!
The Coalition gave pensioners a pittance of an increase in the almost 12 yrs they were in office. They helped the ‘big end of town’ at the expense of the poor and underpaid. If I had a license to steal, I’d be doing well also. I haven’t heard any reasurrences from Abbott re pensioners, women, the poor or the disadvantaged! And this afternoon, both major parties using unemployed young people as their ‘kicking post’? Shame on them
What’s your financial position Robertson? Pretty good, no doubt!
@ Liz45
Incorrect, I live in the most marginal 2007 won seat in Australia (Robertson) and have lots of kids (over 5).
Gillard and the Greens will cost us a lot of money with their environmental taxes.
The water level has not budged an inch in my 55 years. Climate change is happening, but taxing the current generation is not the answer. We need reductions in co2 and incentives, not another BIG TAX.
Whoever wins on saturday will have to deal with GFC 2 that is 95% certain to happen with whats happening in the USA (they cant even pay their ex Government employees pensions) and Europe. GFC 2 will likely take place in 2010, but certainly by June 2011. bank it
JULIUS - Yes on further checking, you’re right about my point (4). As you say, securitization is done mainly by the smaller banks, and (4) was an antidote to (1) which had been catastrophic to the capital of the smaller banks, together with the pricing of (2) the wholesale AAA guarantee which discriminated against the smaller banks:
However, “Your point 3 involves no more than an incidental benefit from a government measure designed to achieve other ends.”
No, I don’t accept that. The idea that including secondhand homes in a scheme whose stated aim was to compensate for the effects of the GST on the housing market, was always laughable. Adding a $7000 premium for new homes (at a time when the median GST for a new home in Sydney was about $40,000) to a $14,000 subsidy was just an insult to the intelligence. The banks were worried about their mortgage repo risks, and homeowners were getting used to so-called “growth” of their home valuations. Ironically, the attraction to land speculation probably had another unintended effect of drawing investment out of the share and bond markets. As if the tax laws haven’t been deliberately doing that for years.
@POWERISNOTSTRENGTH
I wasn’t aware of the banks benefiting specially as you suggest they did. If it is so clear then, presumably, they pushed the government into it and the government justified it to itself as part of the proper government function of stablising the financial system…..
I am not enthusiast for the tax rules that encourage investment in residential real estate though, come to think of it, the CGT relief which presumably increases the supply of rental housing is possibly less noxious than the US mortgage interest tax relief which seems quite unprincipled if there is no tax which is payable because of home ownership to the same government.
Your point about money being taken out of the equity and bond market because of the tax system’s favouring residential real estate is worth thinking about in connection with the reason why the banks seem so reliably profitable to their many shareholders direct and indirect. It makes the shares in banks cheaper of course. I don’t know how far margin lending or home equity borrowing for share market investment counteracts the incentive to invest in real estate. Certainly the over investment (as you and I probably both see it) in one’s own home because it is not subject to CGT at all is not good for share market investing. (I suspect that most countries make the same concession).
“The banks don’t know these people are unemployed. They don’t have access to tax information.”
Scott, I really don’t think the Aussie banks get this wrong. A huge amount of personal information is readily available if you have analysis resources on the scale of the banks.
And if you don’t believe me, think about this little gem. Here in the US we have had to pass specific laws to try and stop banks from targeting people in financial distress. They didn’t get to be “too big to fail” by being stupid.
JULIUS -
According to Chris Joye, Australian bank shares are the nearest financial instrument to a proxy for house prices. He claims hedge funds are shorting our banks in anticipation of a house price crash.
That would imply that when investors are optimistic about Australian house prices they are long in Australian banks. So when I say “drawing investment out of the share and bond markets,” that would clearly not affect all share sectors uniformly. And it would imply that every boost to land prices benefits the banks.
Your point about increasing “the supply of rental housing” would be sufficient to justify a lot of intervention, if that were the case. In principle, there’s probably little difference between families owning their homes and renting them from an economic point of view. But I don’t think that’s what’s happening.
The problem is the number of economic and political factors which combine to inhibit not only building activity volume, but also the volume turnover of existing housing stock.* These have raised the overall size of the housing mortgage market, in a similar way that OPEC was able to increase revenue by reducing oil supply in the 1970s. This state of affairs seems to have arisen initially as unintended consequences of various things, but has been bipartisan policy for the last eight or so years.
The result is to keep Australian population distribution in a straight-jacket, despite a mounting weight of inefficiencies and lost growth opportunities which is impossible to calculate.
Although this is bad for most of us, it seems to be good for the banks, having the biggest exposure to the upside of house prices but with little of the downside according to APRA (which casts doubt on the alleged trend of shorting banks to proxy houses). And even if APRA’s wrong about the stress-testing, no one’s in any doubt now after the wholesale guarantee, that the government is always there for them.
(*You mentioned CGT and the family home. Apart from some rorting of fake personal homes which are really investment homes, there’s probably very little deadweight effect on behaviour, since people like to own a nice home anyway for lifestyle reasons. Far more damaging is the fact that investors have taken up the practice of realizing capital gain by reborrowing against price increases - without disposing of any asset, and therefore without any CGT liability.)
@ POWERISNOTSTRENGTH
I hadn’t read that Christopher Joye piece. I am aware of him because my shortcut to Business Spectator always comes up with a now old article of his attacking the Reserve Bank. He obviously isn’t a crank like Keen.
You do me the courtesy of noticing that I did not personally justify the distortions which may increase the supply of rental housing. Let me add another thought prompted by your suggestion that whether people rent or own may not make much difference. I suggest that a lot less wasted space is built for rental housing than for the occupier owned dwelling for the obvious reason that the latter is the beneficiary of there being no CGT while the common assumption (correct for a very long period) is that real house prices in Australia increase plus the avoidance of tax on the inflationary element of the house price rise.
When in a position where I might have had some effect I adocated many years ago that stamp duty on real estate purchases should be phased out. I think my replacement - apart from governments spending less money - was some sort of low rate capital tax, to be collected efficiently by being added to the rate bills.
We haven’t mentioned yet that it is the state governments who are the real villains in the benefiting from real estate price rises…..
Dr Denniss, can you please explain one thing for me. I think it was Ralph Norris who was justifying the $6b as a ‘reasonable return’ on investment of around 6%. I may be wrong there but I think you will know what I am talking about. He arrived at the figure by referring to the $6b profit as a percentage of the loan book, if I recall correctly.
Now this is a ridiculous scenario, in that the loan book is not the market capitalisation, so using the loan book as the denominator is a non-sequitur, isn’t it?
Even if you used the market capitalisation (the total value calculated as the current share price times the number of shares) this would be a ridiculous way to work out return on investment as the market cap is not the asset value.
Surely the denominator in working out the return on investment would be the actual asset base, i.e. the physical assets that are owned by the bank, which would be much less, whis would result in the return on investment being multiples of his apparent 6% ROI. Surely I’m not the only one who sees that. Was Ralph Norris guilty of a non-sequitur when he made those comments?
Re credi card charges, of course it is a rort. If there were real competition in the banking sector then credit card charges in the vicinity of 15% would be readily available, and still allow for a usurer’s profit. The comments defending the banks ‘because otherwise we might be like USA’ really don’t understand the lack of competition in the sector, or the fact that the banks are virtually beyond normal business disciplines. Invariably there errors are passed on to the customers as costs, homeside and a host of incompetent banking decisions over the last 30 years have been paid for by the consumer, not the shareholder. Re-regulation and higher taxing of the banking sector is a no-brainer.
@ Dog’s Breakfast
I am not much interested in what Ralph Norris has said but don’t suppose him likely to make gross errors of logic in relation to significant financial facts and stats. I can easily see how he could include in his case for whatever that the bank was doing a good job by increasing its loans to businesses and housebuyers so naturally would be expected to make a higher profit. So the loan book as denominator may be relevant and make sense in context.
As to your suggestion that the ROI should be related to “the physical assets … owned by the bank” as its “actual asset base” that suggests a basic misunderstanding of business and accounting. Most of a bank’s equity is not in “physical assets” but in the capital base required by Basel conventions to support its superstructure of debt.
On credit cards and your desire for “re-regulation”, you are apparently not aware of the high degree of regulation that there already is. E.g. the reduction in charges for EFTPOS and the changes to regulation which meant that the banks’ credit cards can’t any longer compete in frequent flyer points with American Express. In general however I find it touching that you have such faith in politicians and bureaucrats that you seem to assume their regulatory intervention will be a positive. On your analysis they have already failed but what I think you are really saying is that you would like to mandate some particular rules you favour. But….
Before you assume that the banks are overcharging for credit card use (still, after the Reserve Bank’s regulatory efforts, or is it APRA?) you might consider the possibility that the people who pay high “interest” rates to banks on their credit card debts are those who once would have been off to the pawnbroker where they might pay, legally, 48 per cent per annum. (Still the legal maximum to the best of my knowledge). Those who can readily pay off their credit card debts usually do so those that don’t pay promptly are likely to be those that the moneylender would have charged 30 per cent or more.
JULIUS,
I think everyone has long agreed that stamp duty on real estate is inefficient and poorly serves the public interest. The problem is that the states have such a limited influence over their own budgets, which as Ross Garnaut suggests provides little incentive to improve productivity, tax efficiency, or even a high standard of public goods.
The more efficient taxes available to them are usually politically unpopular, often for dumb reasons, such as land tax (“but I’m asset rich and cash poor!”) or payroll tax (“ohmigod, a tax on jobs!”) so they make do with inefficient taxes for most of their internal revenue.
NSW has not benefitted that much from rising home prices in the last five years. this spreadsheet shows stamp duty on residential homes (select “residential” in cell D11) rising only slowly and uncertainly since 2004/5. And this spreadsheet shows total stamp duty not increasing noticeably since 2003/4.
Nevertheless NSW is phasing out stamp duty for new homes up to $600,000 this year, which is better than anything the Commonwealth has done lately in the housing policy space.
@Julius and @ Dog’s Breakfast:
My recollection is that Norris was quoted as saying that the Commonwealth Bank profits represented 6% return on funds employed.
I checked at the time and found the 2009 annual report online. You can do likewise and divide the shareholders’ equity with the EBIT. It will be far more than 6% and is a much more relevant indicator of how hard the investors’ funds are working.
They’re doing OK, thanks.
@John Bennetts - That’s Return on shareholders equity, not Return on Capital. Capital incorporates debt financing as well. Return of Shareholders equity is always higher as there is greater risk being a shareholder than a debt holder (as you are last in the line of creditors)
Correct, Scott. I am useless as a business analyst or accountant.
ROE is what I chose to use. Return on Funds Employed includes deposits and borrowings as well as anything else they can scrape up to increase the divisor. I’m not sure what is in or out.
ROE or EPS (earnings per share) makes more sense to me but will for banks always be bigger number. Ralph Norris has chosen to use the smaller number which also makes much less sense to me.
To quote Theresa:
“HEAR, HEAR!! You are absolutely right Dr Denniss!”