Amid all the calls for financial intervention and banking inquiries, some of the best and brightest minds in the policy-making firmament have lost sight of just where Australia is at the moment.
In particular, too many intelligent people are mistaking things they perceive to be bad, such as the dominance of the big four banks, for problems in the financial system and the wider economy — problems which might be capable of being controlled by the Federal government or regulators.
Ian Harper, a member of the Wallis Inquiry into the financial system from the late 1990’s, got a lot of publicity this week suggesting that he “would be prepared to consider refashioning it to hand responsibility for regulating banks back to the Reserve Bank, if another inquiry was launched”. Harper was behind the successful Wallis Inquiry push to split banking regulatory functions from the RBA into what became APRA.
“I am not suggesting that the whole financial system is broken, but it is clear the trajectory of its evolution has been different to that anticipated by Wallis and for which Australia’s regulatory institutions were designed,” Harper said.
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Having learnt the lessons of the HIH collapse, which was a major initial blot for APRA in 2001, the regulator moved to stiffen its oversight of our banks as the last decade progressed. It stopped banks building up huge off-balance-sheet credit risks (well, the NAB went ahead and is still paying a price) and took a hard line on credit derivatives and other exotic investments. What it couldn’t stop was the silly lending to the likes of ABC Learning, Babcock and Brown and Allco Finance (among a string of collapsed companies). No regulator can stop that: the RBA failed abysmally in the late 1980s and early 1990s. Regulators around the world fail regularly to stop banks and other financial groups from doing silly deals and loans. As the old public service saying goes, “you can’t regulate for stupidity”. But each time, taxpayers seem to pay some or all of the cost.
Harper supported a call from the “six economists” in 2009 for a new Wallis-style inquiry into the financial system. That call drew an unusual unity ticket between the government and News Limited. Wayne Swan rejected the need for an inquiry and News Ltd launched a series of commentators including Terry McCrann, against it.
Since then, Joe Hockey has picked up the fallen standard and has been promising an inquiry to address systemic financial sector issues, particularly around the role of the major banks and how they are regulated.
The driver for renewed calls for an inquiry is a report by Abacus, the industry body representing credit unions, building societies and other mutuals, who want to see greater competition in financial services. So there is a natural bias in their report, although, pace Harper, just how shifting responsibility for the banks from APRA back to the RBA would improve competition isn’t explained.
Yes, we have a banking oligopoly, one strengthened by the financial crisis and Swan and the ACCC waving through bank mergers during the crisis. But what to do about it? The six economists mentioned — but did not advocate — a “people’s bank” proposal, as a means of engendering competition. One model could have been using Australia Post as the basis for a new bank. But that proposal drew scorn from all corners.
Problem is, without that option, how do you encourage greater competition?
Breaking up the big four would increase their riskiness and lower their credit ratings. The big four are, like Australia’s sovereign rating, in an increasingly smaller group of AA-plus rated banks around the world. Breaking them up and reducing those ratings would increase their funding costs domestically and offshore (and would also raise the costs of funding for members of Abacus, something they don’t mention). That would penalise shareholders, superannuation funds and their customers, and clients of the bank, business and private, would face higher costs.
Then there’s foreign banks. But they are going to be reluctant to return here, not because Australia is a bad or risky place, but because their own financial health is weak (especially if they come from Europe or the US). Japanese banks are said to be interested in Australia, but they seem to be replacing European banks as funders of last resort for business lending.
Offshore giants Citigroup and HSBC continue to operate in Australia. The latter is stronger than Citi (which is selling for around half its net asset backing per share, which tells you how strong it is). For whatever reason (probably an adventure in the US that cost the best part of $US60 billion in dodgy loans and investments), HSBC has never tried to expand significantly in this country, despite being a long-time holder of a banking licence. That it has chosen not to try and grow quickly (apart for some big losses backing the likes of Alan Bond out of Hong Kong and Australia in the late 1980s), tells us how hard it is to get sound foreign banks to increase competition in this country.
The best means of engendering competition lies outside Australia’s control. It requires a fix for the eurozone and its banks once and for all. That will increase the chances of serious foreign competition for the big four, and reduce wholesale funding costs for the domestic non-banking sector and smaller banks.
That’s not to say there isn’t merit in the call for an inquiry: the logic argued by the six economists remains intact and, indeed, more compelling than ever. Australia’s financial system held up reasonably well in the GFC, due to good regulation and government intervention, but next time we might not be so lucky.
But as we’ve seen with Abacus, calls for inquiries always have motivations. There’s a motivation, too, in Joe Hockey now declaring he wants to add superannuation to the issues a financial inquiry will cover. His original terms of reference barely mentioned super, but overnight he told The Australian Financial Review that the sheer scale of superannuation means it should be covered.
If the Coalition was a disinterested party on super, this could be believed. But it’s not. A red mist descends on even the most intelligent Coalition MPs when it comes to the industry super sector. Having failed to cripple the sector with its “choice” reforms under the Howard government, the Coalition is now gunning for it: it wants to reverse many of the pro-consumer FOFA reforms (which if left intact would be one of the Gillard government’s most important reforms) and go after what Tony Abbott calls, with no evidence, corrupt union officials appointed to industry super boards. The industry super sector, which routinely significantly outperforms the big bank and AMP-controlled retail super sector, is a walking, talking rebuke to the free market zealots and the financial planning industry, and the Coalition hates it.
Inquiries are good, but beware participants with agendas and their apparently willing public advocates.