In case the 2010 industry campaign against the mining tax wasn’t scary enough, ANZ chief Mike Smith took the bullying to another level last week when he threatened to jack up everybody’s interest rates by half a per cent if the government accepted a recommendation from David Murray’s Financial System Inquiry to increase big bank capital buffers.

Talk about hip-pocket nerve. That is a direct threat to millions of voters with mortgages which the miners could never match. Just imagine the advertising campaign Neil Lawrence could dream up this time!

Smith’s call was meant as a shot across the bows for the federal government but, if echoed across the banking industry, could — arguably should — trigger action on price-signalling by the ACCC.

Remember former treasurer Wayne Swan toughened up price-signalling laws in 2011, singling out the banking sector, to make sure banks were not effectively colluding on interest rate decisions.

The price-signalling laws have never been used, and in September Ian Harper’s competition law review has called for the abolition of those laws now.

Not so fast. If the banks are threatening a mining-industry-style campaign against tougher capital requirements, the price-signalling laws could be a handy tool for the government to retaliate, particularly the prohibition on “public disclosures of information relating to price, capacity or commercial strategy”.

The purpose of tougher capital adequacy requirements is to ensure taxpayers are never again forced to bail out banks which are “too big to fail”, as they were at the height of the financial crisis in 2008.

As ABC business editor Ian Verrender pointed out in this this excellent piece, and as Crikey has argued here, it is a myth that Australia’s banking system dodged the GFC because it was fundamentally sound. We were lucky to avoid a bank failure — Macquarie in particular was in dire straits — and that’s why the wholesale funding and deposit guarantees were introduced in an emergency, at the behest of the banking lobby.

The Murray inquiry, appointed by Treasurer Joe Hockey, released its interim report in July and will release its final report within weeks. Most observers expect Murray to recommend that capital requirements for banks deemed systemically important should be raised from 9% to 10% and the risk weighting on home loans — a measure of the likelihood of default, mandated by the banking regulator APRA — should be increased from 18% to 25%.

Barely five years later the industry dares threaten the government if it should move to increase capital adequacy requirements to prevent a repeat occurrence. This from an industry that has already successfully lobbied to water down the former government’s Future of Financial Advice laws despite a plethora of financial advice scandals so the orgy of greed-driven mis-selling by conflicted, bank-owned or aligned financial planners can begin again. Crank up the boom.

Westpac’s stellar $7.6 billion after-tax profit result for 2013-14 — released this morning — lifts to $29 billion the combined profits the big four banks now make in a year, marking an enviable 10% growth in profit from last year’s $26 billion. It’s an historic number, but apparently not enough to absorb the cost of tougher capital adequacy requirements. Smith warned the cost will inevitably be passed on to bank customers. Westpac chief Gail Kelly was more measured in her comments this morning, expressing strong support for a stable banking system, and the Financial System Inquiry itself, while calling for more discussion before any recommendations are implemented.

But the same warning signals were clearly given. “You can ever-increase capital and become ever-more safe, but that does come at a cost,” said Kelly, adding that the banks “like any business, [would] think about passing the cost on”.

Some analysts argue passing the cost on will be difficult because of the degree of competition in lending. If only that were the case. The big four’s net interest margins — the difference between the average interest rate banks charge you on loans, to the rate they pay you on deposits — are bouncing around 2% (plus or minus a bit) with the ailing NAB at 1.93%, Westpac at 2.01%, ANZ at 2.12% and behemoth CBA at 2.14%.

Too close for comfort.

Peter Fray

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