Business

Apr 24, 2018

Breaking up the banks is a terrible solution

"Breaking up the banks" takes us backward; it uses the powers of the state to try and create a Jurassic Park of big beasts, freezing capitalist development at a certain stage, which is taken to be the natural order.

Guy Rundle — Correspondent-at-large

Guy Rundle

Correspondent-at-large

With the torrent of revelations from the Banking Royal Commission -- sweet perversity that Turnbull has had his BEST NEWSPOLL RESULT IN 31! TURNED THE CORNER! HAD A RANDOM STATISTICAL VARIATION! -- there have come calls from some on the left to "break up the banks". This was a refrain taken up by Bernie Sanders in the 2016 primary and presidential campaign, a decade after the 2007-8 crash, for the lack of prosecutions or much transformation in the financial sector.

Australia missed anything like that. We would have got it, had the Coalition been in charge, and imposed austerity. But, as the commission is making clear, we got something else: a regime of poking, prodding, lying to, and bullying some less savvy and often vulnerable customers into borrowing more than they could afford.

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15 comments

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15 thoughts on “Breaking up the banks is a terrible solution

  1. Smit

    As I recall, at the end of the Fitzgerald inquiry in Queensland, he recommended that all police from Sergeant and above be replaced. Of course that was never done for obvious reasons. Are we in the same place with the banks?

  2. Administrator

    Breaking up the banks is a top idea if it is done to reverse the vertical integration that diversified our major banks into insurance, superannuation, stockbroking and share trading.

    Comparison with Bernie Sanders’ campaign, Jurassic Park and the US banking system are wholly misguided. The US has thousands of banks, some of them virtually family companies with two branches. The US used powerful anti-trust legislation to create a banking industry unlike anything Australia has ever had and nothing like we ever want.

    The consolidation of the Australian banks has resulted from three phenomenon, at least two of them undesirable. The first was the commercial failure of the State Banks and many Building Societies, not directly because of their ownership but because of poor prudential management. The second was the amalgamation which saw the bigger fish consume the smaller and yes, that kind of predation is an aspect of capitalism, But it is an unregulated capitalism when it produces oligopolies by design. And the third was the defeat of the foreign banks which were weak because they were too many, lacking scale.

    Any argument for public ownership of an Australian bank would fail because of their past record of failures. More than enough taxpayer money has been spent feeding Christians to lions.

    The first need is for the divestiture of non-banking businesses. It is not a breaking of banks, it is a purification of banks.

    1. Wayne Cusick

      One could argue that the government should automatically own part of the banks it guarantees. That’d be the big 4.

      The question then becomes, what portion?

      1. Administrator

        Wayne,
        The guarantee is a service that comes at a price. The government in 2008 set the price at $zero, apparently misunderstanding the risk and the value. That creates a debt. It would be unsound to argue that it creates a right to equity, unless the debt went unpaid. I want the debt paid, because I am unwilling as a taxpayer to subsidise bank shareholders.

    2. campidg

      One of the main issue to come up from the inquiry was financial consulting malpractice. I agree with Guy that the ownership model is the real problem but surely regulating forbidding any licensed financial consultant of financial consulting firm from being being part of or any way connected to any kind of entity that issues investment product like shares, bonds, term deposits, etc is a no brainer. But despite what you say about the poor management of the mutual banking sector,, greater transparency, tighter regulation and even the automation of many functions could make a measured remutualisation viable. You could say that an system created by the force of regulation would produce inferior standards of management than one where the profit drives professionalism, but the current profit driven system has produced highly efficient ‘professional’ businesses where professionalism is solely about competence with no ethical component.

      1. Administrator

        “You could say that an system created by the force of regulation would produce inferior standards of management…”
        No, that is not what I said. Read the histories of the failures of State Bank Vic and State Bank SA. They failed because of poor prudential management of their risks. They did not have the scale of the major banks and could not attract top talent. Their owners (Governments) used employment contracts that rewarded growth indiscriminately because their commercial naivety did not discourage high risk.
        The failure of State Bank Vic would have bankrupted Victoria had it been a company and those losses were borne by taxpayers. I do not want to see governments taking those risks again.

  3. David Nicholas

    Guy, couldn’t agree more.
    “For those of us on the left, the only demand is that the banks be socialised; that a wholly owned government bank be established, with workers, consumers, and community representatives on its board; that the major banks be socialised in various ways, some being turned into de facto community banks, in whole or part, with others having a mix of private, state and community ownership.”
    If this were to happen we could all die happy. It’s a good solution to combat greed and perhaps tackle corporate corruption and temper our fascination with international borrowing.
    There are a lot of big pigs with their noses in the trough that have to be removed. No small task it would seem. But worth the attempt in my view.

    1. gjb

      The Australian tax payer is already a shareholder of half the big four banks

      “The fact that National Australia Bank [ASX: NAB] had to borrow USD$4.5 billion from the US Federal Reserve during 2008 and 2009.
      And Westpac Banking Corp [ASX: WBC] needed USD$1.09 billion in January of 2008 and 2009.
      What’s that, you don’t know anything about it?
      And you don’t remember reading about it?
      There’s a simple reason for that. It’s been top secret information until yesterday morning.
      That’s right, if it wasn’t for the passing of controversial legislation in the United States you’d never have found out about NAB and Westpac’s Federal Reserve bail outs.”
      (K. Sayce 3/12/2010).
      And still they want more??

      1. AR

        Well that makes the ice bucket shock seem a tepid shower.
        Thanks for the heads up.

  4. RL

    I reckon having the freedom to be bamboozled by endless choice in everything is one of the great gifts of capitalism.
    It started for me when aisles of every possible variation on the breakfast cereal theme appeared in supermarkets and I’ve been on pin the tail on the donkey mode ever since.

  5. Dog's Breakfast

    Certainly spreading ownership across government, community associations etc would put a knife through the heart of the problem, which is the profit motive, or if you’re a Director – fiduciary duty.

    I had a conversation with a bloke last Thursday who is a slightly re-constructed capitalist who was arguing that it is the fiduciary duty of bankers etc to find the greatest possible profit. It is reasonable on face value to argue that, and our company law formally requires such of our businesses, in a roundabout way.

    I’m happy also to argue that ‘fiduciary duty’ encapsulates a shiteload more than just maximising profits, and even then it can be argued that maximising profits for the long term is a very different beast to short term gain. Long term thinking would not see ravaging your customers and would entail having the best reputation FOR customers, long term, which would be at a cost of short term profiteering.

    Clarity around that term ‘fiduciary duty’ and what it really means, would be helpful in a legal sense. Maximising profit will always see problems unless a very long term view is taken. Having employees bonuses based on meeting revenue/profit targets is the ultimate cancer, but without socialisation of the entities that can’t happen.

    Given that the suggested socialisation is unlikely to occur, I’d be breaking up the vertical integration. This appears likely to happen organically, as bankers have found that it doesn’t actually help their profits much, and does damage their reputation and increase their risks.

    But given the choice, I’d go for government/community ownership structures, but that still seems far away.

  6. Woopwoop

    Nationalising the banks might never happen, but surely there is room for one government owned bank, like the old Commonwealth Bank.
    If it was run more transparently and less rapaciously than the commercial banks, customers would presumably flock to it.

    1. drsmithy

      If it were also explicitly identified as the only bank with a Government deposit guarantee, people would flock to it.

  7. campidg

    Drsmithy just reminded me of the Government Deposit Guarantee and how the last Labour government tried to introduce an insurance premium that banks had to pay to receive it. The big four flatly refused and no more was heard of it. Surely now is the time to revisit the issue but that episode does beg the question, who successful can our government be in reigning in such powerful institutions? Does the Australian banking oligopoly exercise so much control over our transactions, interest rates, our access to credit and our ability to save that any attempt at firmer regulation will result in tacit threats of ‘onerous costs being passed to individuals and businesses’ regardless of the ability of the ability of the majors to absorb any costs, and politically weak governments inability to absorb the political cost forcing a backdown? It may be that the political cost of inaction is just starting to outweigh the cost of action.

  8. Ruv Draba

    Breaking up ‘the banks’ might be the wrong question to start with. Better questions might be:
    1) which financial services must be disaggregated and better monitored to ensure market transparency; and
    2) which financial services (whether in banks or ‘shadow banks’) act as mere regulation-avoiding obfuscations and ought to be banned?

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