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Federal

Oct 21, 2010

Hockey gets it right on banks

Joe Hockey may have stumbled on interest rate regulation this regulation, but he is right to call for a debate about the way we regulate the banks.

Joe Hockey may have blundered into the issue of bank regulation, but he is dead right about the need for a fundamental debate about financial regulation.

Hockey overplayed his attack on Wayne Swan this morning over bank interest rate rises outside the RBA cash rate when he appeared to suggest legislative measures to curb interest rate rises. He was very quickly under fire from all quarters, particularly from the bankers’ cartel, not least for the apparent hypocrisy of the party of small government calling for more regulation of markets.

At a press conference this morning he pulled back significantly, and used as his cover a call for a “social compact” and a fundamental debate about the responsibilities of major banks and how they should be regulated. He is not, he made clear, calling for regulation of interest rates.

Hockey will doubtless be hammered by the Press Gallery for his clumsy handling but what he had to say about finance regulation was the most sensible thing we’ve heard from a major party politician on financial regulation since the GFC.

The Reserve Bank made it clear this week that the major banks’ repeated claims that they are facing higher borrowing costs are, not to put too fine a point on it, rubbish. The RBA minutes from its meeting two weeks ago were extraordinarily blunt for the central bank: “members noted staff estimates that banks’ funding costs had been relatively flat over recent months. While the spread between lending rates and funding costs was below its peak in 2009, it remained well above its pre-crisis level.”

If anything, that suggests that, in the event of a rate rise by the RBA, there’s a case for the Big Four to increase rates by less than the increase in the cash rate, not more.

There are two key issues raised by Hockey that should form the basis of the debate he wants to see.

One is the need for greater competition for the big banks, which has been seriously impaired since the GFC. Hockey mentioned an idea he raised in 2009, of a government guarantee for Residential Mortgage Backed Securities, to try to breathe further life into the non-bank lending market. That sector has been on government-funded life support ever since, courtesy of $16b worth of funding from Wayne Swan. It has been slowly — very slowly — recovering, but is obviously not within cooee of providing the sort of competitive pressure it provided for the banks before the GFC.

If Hockey is serious about encouraging more competition for the big banks he should be exploring some of the ideas raised by the Six Economists in July last year, especially around a “people’s bank” that could deliver low-cost financial and lending services (I’ve previously suggested Australia Post could be the delivery mechanism for such a bank, or AP could team up with one of the major regional banks).

The ACCC should also be looking a lot more closely at the manner in which the Big Banks appear to be coordinating their interest rate rises by publicly flagging rate increases beyond the cash rate — behaviour that looks an awful lot like a public kind of collusion between oligopolists.

But Hockey raised a more fundamental issue of whether banks should be growth stocks or yield stocks, and in doing so has opened the way to the sort of debate that some economists have been calling for for some time.

In the wake of the GFC, there is a basic tension at the heart of our regulation of the big banks. Their core activities of domestic borrowing and lending for households and businesses are never going to grow rapidly. But bank executives are ruthlessly focused on growing their share prices. This is where the dilemma over being growth stocks or yield stocks plays out. Our big banks make excellent yield stocks – they are low-risk, have been tested and proven by the GFC, and produce a steady, strong profit stream. But they’re not growth stocks, particularly in a market where the RBA is clearly anxious to limit the growth of credit.

The only way the banks will become growth stocks is by expanding into riskier areas of operation.

Bear in mind that, by accident and design, it was our banks’ non-exposure to riskier activities, unlike their American and European counterparts, that was a key reason why we dodged the GFC bullet. Now our banks are hunting for growth, most obviously in offshore expansion, for example expanding into riskier Asian markets. And they’re doing so with an implicit government guarantee. The Government’s actions in the GFC signalled that, indeed, our largest banks are too big to be allowed to fail. They are so crucial to Australian economy that they will not be allowed to fail — no matter how risky their behaviour.

It’s as good an example of moral hazard as you’ll get at the moment.

The banks are behaving like private companies but should be regulated like utilities, and compelled to focus on lower-risk, bread-and-butter financial services. They already generate, as Hockey said this morning, “super profits”. CEOs’ need to pump up their share prices for the sake of a bigger performance bonus shouldn’t place at risk the critical economic role played by the banks, nor should it be supported by a de facto government guarantee.

These are the issues Hockey has now put on the table, whether by accident or design. It’s in contrast to Wayne Swan, who since his (deft) handling of the GFC has been strangely reticent on the issue of banking competition and regulation. If Swan was smart, he’d put aside bagging Hockey — there’ll be lots of other opportunities to do that — and seize on the chance to pursue them.

Oh and one more thing. Hockey is right about the banks earning super profits. Which begs the question — is a super profits tax on banks worth considering?

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117 comments

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117 thoughts on “Hockey gets it right on banks

  1. John

    Dear Bernard,
    When did you become a communist?

  2. Puff, the Magic Dragon.

    [But Hockey raised a more fundamental issue of whether banks should be growth stocks or yield stocks,]

    [But bank executives are ruthlessly focused on growing their share prices. ]

    I wonder what part do remuneration packages play in driving this focus?

    In my limited knowledge of the financial sector, I have questions. As we have seen, if the foray into ‘riskier activities’ goes horribly wrong the losses are socialised. If these banks (and by extension the investments of their shareholders) are too big to be allowed to fail, they are too big to take decisions that places risk on the taxpayer without the taxpayer (the government) having a say and sharing in the profits.

    If the banks wish to pursue growth of share price and take on risk, without expecting the socialisation of losses, then people need an alternative where they can put their money and avoid that risk.

    Bernard, this point you made is very pertinent.
    [CEOs’ need to pump up their share prices for the sake of a bigger performance bonus shouldn’t place at risk the critical economic role played by the banks, nor should it be supported by a de facto government guarantee.]

  3. Jimmy

    A “super profits tax” (which by the way si the worst name ever thought of) works for the mining sector because effectively all it is doing is charging the miners more for the resources the are buying off the commonwealth. I cna not see how you could apply one to the banking or any other industry and still operate an economy which encourages growth.
    As for greater regulation to promote competition or control rates this sounds to me like one of those things like “stop the boats” which sounds great but doesn’t work in practice.
    Basically until the consumer starts voting with their feet and moving to the smaller banks or credit unions the banks will be allowed to dictate. Earlier this month I was able to take out a loan with a fixed rate for 1 year of 6.5% at a credit union, the same loan with the CBA is 7.09%.

  4. David

    Bernard Hockey says, is not, he made clear, calling for regulation of interest rates. That at a press stop. So why on ABC AM this morning did he launch into a diatribe of evasive nonsense about “different planks” that the Treasurer has available and should use on the banks …”please describe these planks, Mr Hockey?”..well you know there are many and he is scared of the banks, he and the Govt are incapable of managing the economy….”but what are these various planks that you say you would use and Mr Swan is not?”…”well Mr Swan just doesn’t know what he is doing, he is hopeless the banks do as they like and he comes out and says they shouldn’t but does nothing.”…..more evasive rubbish from Hockey. One set of answers for a gaggle of media and another for the great unwashed public, who are sitting ducks for a drop of good old politicising and to hell with the facts. Hockey is an oaf and Swan is right to bag him for the incompetent big mouth fool he is.

  5. dirt armature

    Could Hockey please also ‘stumble onto’ a populist but incredibly accurate spray about the usury levels of interest rates for credit cards? Who regulates those vampiric blood-sucking pieces of plastic?

  6. Apathy

    Bernard – I think you are being very unkind by giving the credit to Joe for raising “these fundamental issues.” One suspects that it was probably more likely a staffer earning their keep by once again partaking in the delicate art of Deflectus Ignoramus. One suspects that these staffers might be the faceless men (and women) of the Liberal Party.

  7. Jimmy

    David, Hockey is one of the best at repeating the same answer to different questions. This is one of the biggest problems with Politics today, the few times journalists ask the hard questions they just get todays sound bite repeated ad nauseum. Interviewer’s should jsut stop the interview and leave dead air time as soon as politicians start to do this.

  8. Martin C. Jones

    Two points: the first on the spread between lending and funding costs, and the second on a super profits tax.

    1) Spreads
    “While the spread between lending rates and funding costs was below its peak in 2009, it remained well above its pre-crisis level.”

    If anything, that suggests that, in the event of a rate rise by the RBA, there’s a case for the Big Four to increase rates by less than the increase in the cash rate, not more.

    Lending/funding spread falls, RBA/bank rate spread increases; Lending/funding spread increases (above pre-crisis level), RBA/bank rate spread falls – makes sense, right? Only if the RBA/bank rate spread increase fully offset the initial lending/funding spread fall; if it didn’t – if the banks absorbed some of the costs – then, depending on the magnitude of the various movements, banks may still have a case to increase their rates more than the RBAs.
    I don’t know the answer to this – perhaps Keane does, but if so he’s ignored it. At any rate, the argument is logically incomplete without this step.

    2) Super profits tax
    I suspect Keane is just provoking us a little, but the prime justification behind the RSPT was the fact that we (Australia) were not getting an equitable return on the sale of non-renewable public assets (resources), rather than that super profits were being made by the mining industry. The “super profits” bit was marketing more than anything else (“those dirty stinking rich buggers deserve to pay more!”), but as a justification for imposing a higher tax rate it’s not nearly as strong.

    That’s not to say a super profits tax is unjustified – we have a progressive personal tax scale, and many arguments for that could be applied to a progressive business tax. But the RSPT/MRRT is a very different kettle of fish to a higher rate of tax on a (renewable) services industry.

  9. Space Kidette

    Bernard,

    The banks have definitely overstepped the mark. And they should be regulated, as there is absolutely no doubt they are gouging customers. I spent many years building computer systems, worth millions, whose sole task was to get their customers to spend more. And this gouging really needs to be be bought into line.

    However, Mr. Hockey’s inept comments this morning, on this topic, did not suggest anything like ‘let’s debate this’, in fact, he lied to the Australian Public by suggesting that the government had the means to control this – now.

  10. Damien

    Bernard, like David, I heard Joe Hockey on AM this morning and he sure didn’t say the words you put in his mouth in this article. Instead he stumbled over the facts, evaded any question in which detail was sought (“Yes, yes, Mr Hockey, but waht are these “levers” the Treasurer controls?” Joe replies: “don’t worry there are plenty of them.”). All here really wanted to say was the Swan has no credibility as Treasurer and would be responsible for any decision made by the big four.

    Anyway as long as it plays well with the shock jocks, like Allan Jones, Joe doesn’t care how stupid he sounded on AM or what credence a debate on financial regulation might have. He and his boss Abbott are most definetly not interested in any such thing and have nothing to add to it in any case.

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