The culture war that’s underway in Australian banking at the moment isn’t especially edifying. And certainly not with the likes of David Murray invoking Nazi Germany, as if this were jut another front in those other culture wars that normally get played out between left and right.
On the one side are the banking regulators — the Reserve Bank, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission — and even the Prime Minister, who all maintain there’s a problem with the culture of banking. ASIC has four inquiries into the banks underway, APRA has an ongoing campaign to force them to raise standards in the area of risk culture. On the other side are the banks, which, by and large, insist any problems are just a few rotten apples/problems that are now in the past/I’ll look into that case that you’ve raised/ I’m as disturbed about it as you, etc.
Problem is, the current focus on banks’ defrauding and gouging their customers and rigging interest rates is only one aspect of a flawed culture. If there is one thing you can say with certainty about banks everywhere — including in Australia — it is that every decade or so, their boards and managements lose sight of the lessons of the past and head down old paths in the desire to make more money. In doing so, they expose themselves and their institutions to ruination and the financial system and the national economy to severe dislocation.
Last week, Crikey quoted from a Reserve Bank paper part-authored by Phil Lowe, the current deputy governor of the RBA, about what happened to Australian banks in the early 1990s:
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“The sum of the individual losses (before tax) in 1990, 1991 and 1992 exceeded A$9 billion — equivalent to over 2.25% of GDP in 1990, or over one-third of the aggregate level of shareholders’ funds in the banking system in 1989.”
In the financial crisis, the potential damage was greater, right up to the destruction of the financial system because the big banks had been shut off from global funding markets and would have gone under without significant support from the RBA (well over $60 billion in six weeks) and loan and deposit guarantees from the federal government. Some $157 billion in debt raisings by the banks were guaranteed by the government up to early 2010, when the scheme ended. And then there was the rescue of BankWest by the Commonwealth after its UK parent collapsed and had to be bailed out by the British government. And Suncorp, the Brisbane insurer and regional bank (Metway), was close to being bailed out until the deposit and debt guarantee schemes were announced in late 2008, which helped stabilise the company’s increasingly frail situation.
And it was a significant failure of the Murray Financial System Inquiry — which produced some otherwise high-quality analysis and recommendations — that it did not canvass the activities of the banks in the lead-up to the financial crisis, their credit and risk policies (and the culture than went with it) and the aftermath. There has never been a public accounting of the problems that the GFC exposed, 15 years or so after the near-death experience of the early 1990s.
In the run-up to the financial crisis the banks — especially the big four, plus aggressive foreigners such as RBS and French and German and US banks — oversaw an orgy of dud loans to the likes of Allco, Opus Prime, Lift Capital, Fincorp, Babcock and Brown, ABC Learning, MFS, Westpoint, Storm Financial (thank you, CBA and Macquarie, for those), Bridgecorp, TimberCorp (an ANZ doozy), Great Southern Plantations, Bill Express, Australian Retail, Australian Capital Reserve and more. More than $160 billion in new capital was provided by investors of all sizes — individuals, super funds large and small, retail funds and big foreign shareholders, all led by the banks.
Despite what they claim now, bankers always forget the lessons of the past and always claim “this time is different”.
Indeed, the ideal royal commission would be into the entire corporate sector, examining wealth destruction, tax avoidance, employee rip-offs, corruption here and offshore and poor governance. If it’s good enough to spend tens of millions of dollars feeding red meat to the conservatives by employing a conservative former higher court judge in Deyson Heydon to do a job on trade unions, then it’s good enough to appoint an aggressive former judge without ties to business, aided by a decent economist with a good understanding of the financial system, to look at corporate Australia.
The problem is, such an inquiry would last forever. Just getting through the aggrieved shareholders and former customers of the big banks would be a titanic effort for a bank royal commission in the two years Bill Shorten has proposed. But it might help avoid a repeat of periodical madness that seizes our banks and leads them into a dangerous bout of lending mania.