Murray tackles ‘too big to fail’, but are we increasing the risk of failure?

When a financial services inquiry was first proposed by Joe Hockey — borrowing from an eclectic group of economists — in 2010, the banking environment was somewhat different. The banking cartel had been lifting interest rates above the RBA’s rises for a year, although few people understood that that merely meant the RBA would be slower to lift official rates and the eventual difference would be minimal. There was considerable focus on the dearth of competition in the banking system in the wake of the financial crisis, which had allowed the big banks to consume some of their nearest smaller rivals.

And there was a lot of talk of “too big to fail” — the problem on institutions that are so large, everyone knows a government won’t let them collapse during a financial crisis, giving it an implicit guarantee that enables it to access funding at a lower cost than smaller competitors and encourages riskier behaviour. In a speech back then, Hockey correctly observed:

… we have the major banks claiming that they need to expand offshore to pursue higher growth opportunities than those they can find domestically, or move into non-core areas of business, like funds management. But it was precisely the absence of these overseas exposures that the RBA regularly opined was the chief saviour of Australia’s banking system during the Financial Crisis.

With massive taxpayer risk in play we as policymakers need to decide if we want the major banks to be unrestrained growth stocks, like resources or technology companies. Or do we want the industry to be more akin to bullet-proof utilities that are focused on delivering stable returns to shareholders? One possible solution here is to quarantine the risks that taxpayers will insure, and accordingly quarantine the coverage of our moral hazard.”

So strident was Hockey on the performance of the banks that an exasperated Mike Smith, CEO of the bank most prone to behaving like an unrestrained growth stock, ANZ, compared him to Hugo Chavez. Hockey talked tough in response: “Bank CEOs can shoot me, they can decry me, they can have a go at me. I don’t mind, because we are standing up for consumers, we’re standing up for small business, we’re standing up for the people that are missing out on more competition in banking.”

Well, maybe. After becoming Treasurer, that focus on too big to fail was watered down by Hockey in the terms of reference for the Murray financial services inquiry, reflecting the much more bank-friendly nature of the inquiry that Hockey finally delivered.

Still, too big to fail occupies some space in the interim report. The report concludes that it “is difficult to estimate the size of any possible funding cost advantage that the perception of being too-big-to-fail provides large banks. This is in large part due to different creditors having different perceptions around risk.” But it knows it’s there, because in the stability section, the report devotes a lot of space to how to address it, asking for comment on measures like:

None of these ideas are likely to win favour from the big banks, but then again the report is a million miles from Hockey’s original talk about regulating them like utilities. However, the inquiry has picked up and run with an issue raised by the Reserve Bank that provides a different context for too big to fail: homegrown contagion from property.

The way our tax system “tends to encourage leveraged and speculative investment in housing” is a problem, the inquiry suggests:

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6 Responses

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  1. Too big to fail”? What happens when they do - society-wise? “GFC”?
    Why can’t they be overseen/regulated not to fail?

    by klewso on Jul 16, 2014 at 1:18 pm

  2. Taxpayers are paying billions of dollars for a swindle pulled off by the world’s biggest banks, using a form of derivative called interest-rate swaps.
    This from an seiu report:

    Derivatives … have turned into a windfall for banks and a nightmare for taxpayers… . While banks are still collecting fixed rates of 3 to 6 percent, they are now regularly paying public entities as little as a tenth of one percent on the outstanding bonds, with rates expected to remain low in the future. Over the life of the deals, banks are now projected to collect billions more than they pay state and local governments – an outcome which amounts to a second bailout for banks, this one paid directly out of state and local budgets.

    by dazza on Jul 16, 2014 at 5:01 pm

  3. Governor of the Bank of England claims jailing banksters won’t stop them from committing crimes in the future??? wtf

    by dazza on Jul 16, 2014 at 5:25 pm

  4. Joe was a big talker while in opposition, and has shown himself to be a puppet in government.

    Swan should have taken him up on his rhetoric in the middle of the GFC and quarantined the retail banking from the rest of the risky banking business, and then only guaranteed the nuts and bolts banking.

    I would have liked to see Hockey either back Swan on this, or squirm away (the more likely outcome)

    by Dogs breakfast on Jul 16, 2014 at 5:48 pm

  5. No wonder bankers are hated more than politicians, they’ve earned it.

    by Liamj on Jul 17, 2014 at 8:31 am

  6. How could you love overpaid leeches.

    by klewso on Jul 17, 2014 at 2:00 pm

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