The failure of the banks to pass on much, if anything, of this week’s interest rate cut, and their ongoing failure of reduce rates for business lending, demonstrates they feel no sense of obligation about the significant assistance provided to them by the Government since the financial crisis began.
Via the lending guarantee, the Government’s incessant jawboning about the strength of the banks here and overseas, and above all by permitting the consolidation of the banking sector to its least competitive state since the early years of deregulation, the Government has enabled the banks to not merely ride out the financial crisis but benefit from it. The big four are now set up to enjoy unprecedented profits in a sector that has been reduced to little more than a cartel.
That this is an act of bastardry is not especially important. More serious is that the banks are acting in a manner directly at odds with the goal of governments and businesses to sustain employment. In fact, in regard to business lending, it’s fair to say the banks are essentially at war with the rest of the economy.
Regulating banks’ lending practices isn’t the answer. Political interference in lending decisions would be counter-productive for all concerned, including the politicians, who would discover blame neatly transferred from bank executives to themselves whenever interest rates went up.
Establishing a new publicly-owned bank to compete with the private sector might not be beyond this Government, with its back-to-the-future announcement this week about broadband, but it would be a hideously expensive way of increasing competitive tension in a sector already in rude health, unlike telecoms.
But there is a relatively simple mechanism for at least partially addressing the failure of the banks to reduce business lending rates. I suggested last year it was time to consider a windfall tax on the profits of the banking oligopoly. Each percentage point of a windfall tax would, based on 2007-08 figures, yield about $170m a year. A 6% windfall tax on banks would yield about one billion dollars in tax revenue.
In 2006-07, according to Ken Henry’s tax review, all but the smallest Australian businesses together paid $12.7b in payroll tax. A windfall bank tax could be directed to the states to fund a rebate of 8-9% in payroll tax, especially for medium-sized businesses, providing an incentive to employ and retain more staff.
The real point, however, would be to link the windfall tax to the banks’ responsiveness to interest rate cuts. The smaller a bank’s interest rate spreads, the lower the tax level, providing the sort of incentive that competition would if there was anything like competition in the banking sector.
The recalcitrance of the banks will only get worse. The Government has made a point of waving through takeovers and mergers that have significantly reduced competition for banks, at a time when the financial crisis was wiping out other competitors. The banks have been treated with kid gloves because of their facilitation role in the economy. Once the economy recovers and interest rates start rising, their gouging will accelerate. Time for the gloves to come off, in an area the banks will clearly understand — their profits.