You can tell that the bank-bashing is starting to be taken seriously when the AFR devotes four pages, an editorial and an op-ed (from Professor Stephen King) to it.

The really on-point piece — apart from King’s excellent effort — was by Jonathan Shapiro, who explained, “Australia businesses are the main victims of higher funding costs, not home owners.”

For all the tabloid fury, talkback anger and political vitriol directed at the banks (including Wayne Swan’s splendid complaint on Tuesday that the CBA’s rate rise was particularly bad for falling on Cup Day), there are systemic issues that are at risk of being overlooked in the emphasis on home mortgage rates and infuriating bank fees.

One of them is that the collapse of non-bank competition has allowed the banking cartel — strengthened by being allowed to gobble up Bankwest and St George — to focus more on lower-risk residential mortgage lending, choking off higher-risk business lending. Small business and the construction industry — which saw some truly scary building approval figures yesterday – continue to pay the price for this. And the cartel knows perfectly well that it will attract far less outrage by punishing business borrowers with higher rates than households that actually vote.

As Michael Pascoe has noted, the higher the banks lift mortgage rates beyond the RBA’s cash rate, the less likely the RBA is to continue lifting rates, given the banks’ usurious levels of greed are doing its job for it (better yet, with the banks wearing the opprobrium instead of the RBA). But rising business lending rates, and tighter business credit, have real world effects on employment and will tip some marginal businesses over the edge. That’s where the lack of banking competition (which won’t be remedied by making it easier to switch accounts, until there are more competitors to switch to) is really hurting.

And don’t forget the banking cartel will find a way to gouge you even if you’re not a borrower. The big four have been allowed to dominate the superannuation industry as well (they have six of the 10 biggest, and several of the worst-performing, funds in the country), although they give their own employees a better deal on fees and commissions than they give the rest of us.

The other systemic problem — as King discusses — relates to risk. The cartel is currently engaged in an industry-wide demonstration of moral hazard, led by ANZ’s forays offshore. Under current regulatory settings, we’re virtually inviting systemically-important institutions to pursue higher-risk growth that may well leave taxpayers stuck with a bill in the tens of billions to bail out banks left exposed in the next financial crisis.

In short, this is about things that might not appeal as much to politicians and the mainstream media as residential mortgage rates, but which are much more important.

None of these are new issues. All of them — including switching costs — were covered in the Six Economists’ letter last year, which brought together different strands of thinking on financial regulation issues by some of the country’s finest economists, all from differing points on the political spectrum. That letter, more than a year ago, identifies exactly the issues that have now moved to the centre of political debate.

If Wayne Swan had heeded the economists’ call for a major Daughter-of-Wallis-style inquiry into financial regulation in July last year, it could now be nearing completion and Labor would have looked decidedly prescient in anticipating the problems caused by the rise and rise of the banking cartel in the wake of the GFC.

Instead, the Government rejected those calls with the same dismissive air with which it knocked back Hockey’s action plan. It may need to be less dismissive now that Hockey has announced he’ll be introducing a private member’s bill on price signalling, which is likely to be supported by the Greens and the independents — assuming the Coalition can draft it properly.

This is not a debate about “reregulation”. The banks are already heavily regulated (starting with protection from takeover via the long-standing ‘four pillars policy’). In fact banking is like a number of sectors in Australia that should properly be regarded as hybrid sectors, somewhere between free enterprise-based and government-based, because of the critical regulatory or funding role played by government. The implicit government guarantee now enjoyed by the big four banks further strengthens this mixed status for banking.

These sectors have been growing in number rather than shrinking, due mainly to the predilection of politicians of both sides for politically-motivated interventionism — think childcare and international education — but also because the tendency of Australian markets to oligopoly keeps throwing up competition challenges for politicians.

Two enduring features of these hybrid sectors are that politicians like to avoid responsibility for the decisions of private companies until they become a political issue, and they don’t realise their existing regulatory or funding settings are wrong until there’s been a major collapse.

A genuine overhaul of banking regulation — rather than just a focus on headlines about fees and higher mortgage rates — might enable us to avoid that result in banking.

Peter Fray

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