Far from monstering the big four banks, it’s now clear the real issue in Australian banking is the role and future position of the smaller lenders and whether they should be allowed to suck off the public purse to be what they will never be, big, strong national banks.

The mouse of a bank plan unveiled by Treasurer Wayne Swan on the weekend contains the nastiest extension of taxpayer support that we have yet seen from the Labor government. In an attempt to win applause, Swan and the government are willing to underwrite all bank deposits in perpetuity in the name of improving competition in the banking industry.

So banks large and small (and there will be more small financial groups entitled to call themselves bank) will get their balance sheets effectively underwritten by taxpayers, without any details of the cost, who will pay or who will really benefit. The cost benefit of this arrangement is far more important than that demanded for the NBN. This new deposit arrangement will last forever.

Effectively we have now been committed to insuring $1.320 trillion of deposits (October 31, according to APRA. At least in the US the FDIC has a fund into which the insurance premiums are paid and from which the claims from the busted banks are paid to depositors who have lost, for all we know, the deposit insurance will remain on the budget as a contingent liability, which could impact our credit rating!

All this escaped the Senate banking inquiry on the first day (as most commentators have missed the point), even after it was clearly laid out for them by Reserve Bank governor Glenn Stevens in his opening remarks:

“The market price of risk having risen, various players want the public purse to take on some of this higher price through various forms of support or regulatory change.

“The various ideas should, of course, be assessed on their merits. But an important high-level point is that, in some instances at least, it would appear the taxpayer is being asked to shoulder more risk, one way or another, in order to facilitate the provision of private finance.

“Whether, and in which areas, that might be a good idea — and if so how much might be charged for such support — is of course for governments and legislatures to determine. Hopefully your inquiries will be able to assist this process.”

This went straight through to the keeper and judging by most media reports, this was ignored. Two writers who got it were Laura Tingle in the AFR and The Australian’s Michael Stutchbury.

And why is this happening? Stevens again explained: “Risk has been repriced since early 2007. All of us are still adjusting to this change and its implications.

“But investors around the world changed their attitude to risk in 2007 and 2008. The compensation they require for taking on risk has increased. Wholesale funding and securitisation are now more expensive. In the case of securitisation, costs have also risen in part because some investors have left the market altogether.”

So what he is saying is that the old pre-GFC way of raising money cheaply and lending it is over. Debt and deposits are costing more and will continue to do so for some time to come.

The old business model (supported by securitisation) that allowed the smaller non-bank lenders, and the smaller banks to flourish, has been abandoned. But the non-bank lenders and the small banks either don’t want to know that, refuse to accept, or can’t change because they have no other business plan.

So like any car manufacturer of old, trade union and professional body or farmer, they want the taxpayer to continue supporting their old ways of doing business and making profits, ignoring the changed circumstances and the impact on the economy and the budget.

But it is even worse, Swan (and the likes of the the Greens and slow Joe Hockey and the Opposition) haven’t even considered what will happen once the guarantee is extended or which deposits should be insured and who will pay.

There is no difference between deposit insurance and insuring a car, travel or your house, but I bet that the government, the Greens etc want the banks to pay. People, depositors, etc, should pay. In fact if the banks and other financial groups pay, depositors will pay (who are in the majority via lower rates) and borrowers will pay via rates that higher than they should be, or remain at levels higher than they should be.

When you insure your car, you pay, so if you want your deposits protected by the government, you should also pay (and will whether it is direct or indirectly). Just listen to the screams of confected outrage from the lazy Greens and Hockey (strange how Joe and the Greens think the same) when this becomes clear.

But there are a couple of other unintended consequences coming up.

The insurance will see all competing non-bank forms of saving impacted. Stockmarket trusts and listed investment companies, unlisted property funds, especially mortgage funds, the remaining managed investment schemes, etc, will all lose out.

Over time the losses will be significant as money that would normally be invested in some of these areas is retained or attracted to insured bank deposits. And the insurance will see the banks slowly cut their deposit rates to reflect the insurance (not so much the cost), which will make it easier to attract and hold money, instead of competing on price (interest rates offered).

There are far more depositors than mortgage holders (more than  half all householders have bank deposits and no mortgages). Over time they will suffer more than the mortgage holders who get any benefit from banning exit fees.

The whole argument over banks is a charade confected in Canberra by Joe Hockey, Tony Abbott and the gutless Gillard government, along with the cynical, scheming Greens. No one has any interest in good policy to benefit everyone in the community.

The Senate inquiry will be a good opportunity wasted. Governor Stevens gave them the ground rules yesterday for the new direction: the advisability or otherwise of assisting small lenders in particular to remain in business with the least possible impact on taxpayers and the budget. That was after the RBA laid bare, in its submission, the flimsy politicking of Hockey and Abbott and the weak-kneed reaction from Swan and  Gillard.

Peter Fray

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