Can we have financial reform when banks are too big to regulate?

It’s been a mixed week for the big banks. Clive Palmer handed them a huge win on financial planning and wealth management by agreeing to support the Coalition’s gutting of the Future of Financial Advice consumer protections — one that will add at least $300 million to $500 million a year to their collective bottom lines from hapless “clients”.

But the interim report of the David Murray inquiry into financial services proved to be rather less pro-big bank than expected from a review led by a former bank CEO. As we discussed on Wednesday, the interim report made an effort to tackle an issue the banks had tried to downplay in their neutering of the inquiry terms of reference — whether they were too big to fail, and what to do about it.

The extent to which this rattled the banks is illustrated by the way the cartel’s most bellicose chief executive, ANZ’s Mike Smith — the bloke who disgustingly compared Joe Hockey in opposition to Hugo Chavez — to pre-emptively attack the idea of requiring the big banks to hold higher capital reserves. ANZ is the bank that has most aggressively used the implicit guarantee of its “too big to fail” status as leverage to expand offshore into riskier, less well-regulated regional markets that increase the threat of external contagion to Australia’s banking system.

Smith would have been mortified to hear that a senior Australian Prudential Regulatory Authority official yesterday expressed sympathy for higher capital buffer requirements for the big banks.

The banks have been unsuccessful at thwarting prudential and stability regulation in recent years, with regulation driven by the international regulatory response to the financial crisis, which has proven impossible to resist despite Australian bankers’ insistence that they’re different to their international colleagues.

But on consumer protections, the big banks have proven not merely too big to fail but too big to regulate. Despite successive financial scandals, the relevant regulator, the Australian Securities and Investments Commission, has repeatedly proven entirely unwilling to actually regulate the big banks. So loath was ASIC to regulate the banks that even when the Commonwealth Bank, already the subject of an enforceable undertaking about its shonky financial planners, confessed to ASIC that one of them had been forging client signatures, ASIC managers literally binned the report and ignored it.

This is our own home-made potential sub-prime disaster, which, if something nasty happens, could devastate the economy and financial system.”

When Labor finally moved comprehensively to address the systemic problems created by the vertical integration (aka big bank takeover) of our wealth management sector, the banks and their front groups in wealth management moved heaven and earth to get the Coalition to undo the reforms that removed conflicted remuneration, ended secret fees and required financial planners to act like the professionals they purport to be. The banks, and the Coalition, proved far too strong for consumers and retirees, whose interests Clive Palmer happily helped bin.

The Coalition, which has refused to accept the need for any inquiry into the Commonwealth and ASIC, has also slashed ASIC’s budget, meaning the “regulator” will, by its own admission, be forced to do less active investigation of the banks’ dodgy wealth management activities. When it comes to consumer interests, the big banks simply have too much power to be regulated. The extent to which the Murray inquiry leads to prudential and stability reforms will therefore be a fascinating test of how, six years on from the financial crisis, the banks’ power now also extends to a capacity to defeat prudential regulation.

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Categories: Companies, Economy, Federal, Markets

One Response

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  1. Economic interests are the most effective ways to avoid being accountable to the law; we tend to associate progressive standards of living to economic strength, but to encourage business ventures we allow larger and larger pieces of the pie to go towards investors, ultimately draining the potential for a strong economy to benefit standards of living across the board, not to mention environmental shortcuts.

    by Ray Butler on Aug 3, 2014 at 12:36 pm

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