What is Future Fund chairman David Murray, a former head of the Commonwealth Bank, doing urging Australia Post (now headed by the former NAB Australian boss Ahmed Fahour) to get into banking?
Is Murray currying favour with the federal Government and Opposition in urging this course of action on Australia Post. If he was still running the CBA, you’d bed Murray would be highly critical of the move.
Murray’s touting comes as banking remains a growing issue for the Government, the Opposition (is Joe Hockey’s foot out of his mouth yet?) and the country and economy as a whole. It’s not denied we need more competition, what has to be worked through is finding the current fault lines in the financial system, which includes banking, possible avenues for repair or modifications, and future proofing, as best as possible the system against problems we saw in 2008-09.
That means we need a fully fledged, wise as possible, examination of the financial system, despite conventional wisdom in this country that we don’t because we survived the GFC and credit crunch, our banks were strong and well regulated.
While broadly that is true, in detail enough problems have emerged for a new inquiry to be called, not the theoretical effort of the Wallis inquiry back in 1997, which gave us the current structure of regulation, but something a bit broader and with less focus on process and more on outcome, something with some of the hallmarks of the Campbell Inquiry from the early 1980s, which set us on our present course.
We need another inquiry into the financial system, not the half-cocked thing suggested by a floundering Joe Hockey yesterday, but a full fledged, everything-is-up-for-grabs probe of the strengths and weaknesses of the country’s entire financial system.
For example, take Murray’s urgings about Australia Post; what was not mentioned is where the regulatory burden should fall, who protects the deposits and other financial dealings Australia Post might engage in? Who would regulate AP’s banking dealings and other facilities? In terms of the financial system, AP is unregulated at the moment. Allowing AP into the financial system in the form advocated by Murray — without working out where it would fit and a host of other questions — would weaken regulation.
We have had piecemeal probes, but they are just examinations at the edge. A a wider inquiry is needed and it should be independent, not parliamentary, with the powers of a Royal Commission merely to make sure that everyone attends and takes it seriously.
This broadest possible inquiry should consider some of the following.
The Australian financial system has a very major weakness, competition is concentrated in four very large banks that are simply too big to fail, While the UK, the US and other countries, plus regulators, have expressed concern at the dangers of having banks deemed too big to fail and have discussed ways of handling a possible failure, we have had silence from the Government and regulators. This is the central weakness of the financial system and the biggest threat to the stability of the economy. The structure of the Australian financial system, based on four big and at the moment sound, banks is a systemic risk of its own. That is not acknowledged by anyone.
This is unsafe, the banks and their management know that they will not be allowed to fail, that if one got into trouble, the regulators would make sure it survived, even as part of another bank. There should be a clear and explicit statement of what happens if one of the big four gets into trouble, what will the regulators and the Government do. Will government funds be used to save or prop up a faltering bank, for example.
This is especially important as the key bank regulator, APRA, moves towards implementing an international agreement (modified for the different circumstances in Australia) on new bank regulation. And inquiry should probe and force APRA, the Reserve Bank and Federal Treasury to discuss and lay out just what they understand by having four banks, any one of which could plunge the economy and society into crisis should it be ineptly managed.
APRA and other regulators should not be allowed to conduct this re-regulation in silence. It should be examined the tested by an inquiry, The new rules don’t start until about 2012, 2013, so we have time now for an inquiry. The Reserve Bank, APRA, ASIC, the ACCC and Federal Treasury should all be required to explain the current structure of the financial system and markets, warts and all.
The recent new agreement between the RBA and the Federal Labor Government on monetary policy says in the key section:
“The Reserve Bank’s mandate to uphold financial stability does not equate to a guarantee of solvency for financial institutions, and the Bank does not see its balance sheet as being available to support insolvent institutions. However, the Reserve Bank’s central position in the financial system, and its position as the ultimate provider of liquidity to the system, gives it a key role in financial crisis management.”
That’s all well and good, but does that mean that the RBA and the Government are turning a blind eye to uncomfortable fact that each of the big four banks are too big to fail? This needs to be discussed and fleshed out in an inquiry into the financial system. The RBA will protect depositors, but if the big four are too big to fail, does that also imply protecting bondholders and shareholders as well? TNA RBA and regulators would say no, but that is not written down anywhere.
Switzerland is insisting that its big two banks, UBS and Credit Suisse, hold more capital and liquidity than many other comparable banks around the world because in terms of the Swiss economy, these two are giants and would cause total collapse if they failed. And remember, UBS came very close to failure in the GFC.
We have four whose assets are considerably more than the size of the Australian economy, and their liabilities.
And don’t say an Australian bank can’t fail. The ANZ and Westpac went close to the edge in the recession of the early 1990s, and in the December quarter of 2008, the Reserve Bank showed its hand by keeping the banking system and the Australian economy solvent by buying tens of billions of dollars of self-securitised residential mortgages from the banks in exchange for about $45 billion in cash, which was enough to tide the banks and the economy over the post-Lehman Brothers crisis.
That experience is why the banks here (and offshore) have been told to keep more liquidity and have higher capital. An inquiry should examine what happened in the December quarter of 2008, whether the banks were adequately prepared (after all it was the Reserve Bank (and no doubt APRA) that told the banks earlier in 2008 to self securitise their home mortgages for this very eventuality, the banks did not prepare off their own bat).
This experience alone calls into question the complaints from the banks about about holding higher levels of capital and liquidity (as Ralph Norris of the CBA has). Their claims should be tested against the level of preparedness in 2008 and their reactions since.
It’s not that our banks escaped the GFC unscathed, they had huge losses on poor loans to the likes of ABC Learning, Babcock and Brown, Allco and a host of other mostly financially questionable groups (whose growth and fall should be a part of any inquiry and whether the banks lending helped these poorly structured and badly run companies survive for longer than they should, or to emerge in the first place). These loan losses were the equivalent of the bad property loans made in the last recession, which almost brought Westpac and the ANZ undone.
The banks helped fund the growth of leveraged lending in the stockmarket via margin loans. The ANZ funded Tricom and other funders who failed or had to be rescued when the market tanked. Tricom’s inability to settle its share dealings at one stage threatened the stock exchange.
From reports so far, there seems to have been little or no understanding of what was being funded at the banks. Banks called their margin loans ruthlessly during the crisis, especially the CBA, which has had its own parliamentary inquiry into the Storm Financial collapse.
This also calls into question the regulation of the markets, especially the stockmarket, investors of all sizes, off-market companies and the like by ASIC. After the moans and groans about the banks, complaints about ASIC (and its fund-raising set of fees and charges, which are disgraceful) and its patchy regulatory record, would have to be the second biggest source of unease about the health of the financial system.
From Westpoint, to the performance of liquidators, to the Storm Financial mess, to shorting (which is another area that should be examined), to market surveillance, prosecutions (ASIC has had a string of high-profile failures), issues such as unexplained price movements before fund-raisings or big announcements, the leaking of announcements to the financial media to soften up investors, are just some of the weaknesses identified by ASIC’s own performance in the past five years.
An inquiry should look at the activities of brokers, investment banks, analysts, fund managers, asset consultants and myriad other fee clippers feeding off the $1.3 trillion superannuation gravy train, from industry funds, to public offer-for-profit funds owned by the banks, to the regulatory oversight of probably the second most important area of the financial system after the big four banks.
Take shorting of shares, a controversial issue when the crash was happening and companies such as the banks (especially Macquarie) were in the sights of hedge funds and others. Often the investors borrowed the funds from fund managers or custodians holding shares for super funds. This stock lending earns a fee, sometimes it goes to the fund, more often than not it goes to the fund manager, or custodian, which is wrong. The shares are not theirs to lend. The shares are owned by the fund, not the manager of custodian who are administrators.
The stock lenders (funds, managers, custodians etc) should be forced to explain the sense (financial, not moral) of lending shares to shorters who sell the same shares, thereby driving down the price of the fund holdings in those companies (such as Macquarie Bank, Fairfax Media and others) and damaging the returns and value of the same funds and their members. Often the fees and profits made from stock lending are small, while the losses in value for the shares or whole portfolios are in the millions of dollars. Why should that illogical practice be condoned. ASIC had an inquiry into this, in private.
There are a host of other questions about ASIC’s performance that need to be addressed. Investors of all sizes have issues with its regulation and its approachability. ASIC could be an inquiry on its own.
And then there’s the regulators, the four are Federal Treasury, APRA, the Reserve Bank and ASIC. A fifth regulator is left out of the Council of Financial Regulators, which oversees the financial system. That’s the ACCC. It’s acquiescence was notable when the purchase of Bank West by the CBA from its broke UK parent was given the OK, while the commission signed off on the acquisition of St George by Westpac, and argued that it would not diminish competition.
And yet, the ACCC is the one the Government, Opposition and consumers look to to solve, resolve, or bash the banks over their behaviour, and yet its consumer protection powers are thought not important enough for the peak body that oversees the financial system That exclusion is illogical.
Both acquisitions have lessened competition. Both Bank West (for reasons of ownership) and St George (rising dud loans in property) were not in the soundest of conditions, but the federal Government’s guarantee system would have supported both through the worst of the GFC. After all, it saved a financial institution that was in worse state in Suncorp, which had more than $18 billion of non-performing loans and was rumoured to be about to be sold when the guarantee system was introduced in October, 2008.
Combined with the RBA’s buying of self-securitised mortgages, St George and Bank West would have followed Suncorp into the stricken but not dead sick bay. St George wasn’t as damaged as Bank West or Suncorp, but it didn’t have the immense strength of the big four.
It’s those two deals, more than anything, that have produced the current structure of the Australian financial system, with its glaring fault line.
No wonder the banks can throw around their weight on interest costs, its a problem of our making and there’s nowhere to go.
And there’s the subordinate, but emerging competition issue of the way the big four send signals to each other on rate rises, led mostly by the likes of Ralph Norris at the CBA and the sainted Gail Kelly at Westpac. It is surely questionable to be talking about rate rises and getting down to margins and sizes of rate rises, without breaching competition rules, isn’t it?
—-And there’s the subordinate, but emerging competition issue of the way the big four send signals to each other on rate rises, led mostly by the likes of Ralph Norris at the CBA and the sainted Gail Kelly at Westpac. It is surely questionable to be talking about rate rises and getting down to margins and sizes of rate rises, without breaching competition rules, isn’t it?—-
It’s on everyones lips, shouted from the roof tops but never makes the light of day. Yes, COLLUSION!!! They do this every minute of the day and nobody in Govt says a word…that says it all.
From another thread.
Sorry about the double posting, but Crikey has several articles today on the same topic and I am technologically challenged.
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Australian banks probably do the banking thing pretty well, after all, they are kept in line on interest rates by building societies and credit unions to a degree.
Where I want to see change is in those back office deals which involve share and security trading with shareholders’ money and related activities which, but for good luck and good government, would have seen them unravel in the GFC.
Australia’s banks need the same medicine which is advocated for the too-big-to-fail banks and insurance companies of America:
… Banking regulator with teeth
… Separate banking from non-banking activities, so that non-bank risks cannot threaten bank resources.
… If they are still too big to fail, split them up.
Come on, Labor! Stop playing tit-for-tat with this ragtag Opposition with a temporary Leader and no clear direction and start governing. Set the agenda. Start by dusting off the Henry Report and stepping up to the plate re greenhouse gas reduction and social equity (including intergenerational equity).
Power is a strange thing. Unused, it evaporates. Political power gained at the ballot box in the form of Government is no different.
Good article. I absolutely agree with the suggestion of a comprehensive and broad ranging review. The next GFC may not be as forgiving and I trust not any of the big four. Endangering the Future Fund by combining it with Australia Post as a fifth entity without said review would expose us to unacceptable risk.
Thanks for another good piece, Glenn.
Note the reasons for failure of BankWest’s parent and the absorption of St George were all around the same thing — investing in a property bubble. Sure, there’s plenty of other ways to lose money once you start liberalising credit and increasing money supply, i.e. printing money with no solid underlying value, as we see in every boom-bust cycle — starting most recently with the Great Depression, the 70s recession and ensuing stagflation, the 1980s/90s boom-bust on the stock market, etc. We seem never to tire of precipitating yet another painful boom-bust cycle, and every time, “this time it’s different!”
Some words from Joe Hockey’s policy advisors:
Perhaps try focusing on delivering affordable housing to Australians as the primary social objective? The issue is being deliberately obfuscated by Lib/Lab to suit their own agendas — getting re-elected and staying in power, giving the banks and various property-based donors fat profits, and deflecting all blame and continuing to (attempt to) fool most of the people all of the time.
Labor has been playing tit-for-tat with this ragtag Opposition because it was very recently a very long-serving and unbeatable government and the ALP wanted to seize power by trying to appeal to the same hip pocket nerve aspirational considerations that focus groups told them were the way to power.
The Australian housing bubble has been caused by too much easy credit from overseas (read US) being fabricated by Wall St off the back of their own dysfunctional derivative products, and the combination of low interest rates and voluminous credit have created an extremely unhealthy price bubble in Australian housing, that is serving no useful economic purpose and disenfranchising a generation.
The RBA is now reluctantly hiking interest rates to try to calm the property bubble, although they never quite spell it out in those words.
To create another low interest operator as ‘competition’ would just be to set the conditions to make the current bubble worse and more destructive when it blows. What has to happen is house prices have to come down, and the banks have to be forced to lend less of this speculative overseas money — although higher interest rates are of course the natural lever to achieve this, so it’s kind of working. The other way to do it is simply to use APRA to make a few more regulations of the banks, if they have the teeth and the heart. Decreasing LVRs to 70-80% for instance would do it with a single blunt instrument. There are more and better ways of directly intervening to guarantee a good supply of affordable housing in this country though.
Joe Hockey is just jumping on the simplistic, aspirational, hip pocket nerve ‘low interest rates’ bandwagon that all recent governments have been doing, which is the first sign that he is incompetent and incapable to ever be Treasurer. Not that Wayne Swan is any more competent, so maybe it’s a prerequisite. Both parties have been playing off the RBA as the bad guy for some time now, where in fact the ALP passed legislation in its first couple of months of govt to deliberately distance itself further from the RBA to give it a real bad guy status. Now if you talk to the RBA about social justice concerns (and it’s in their charter), they say ‘that’s political, you need to talk to Treasury about that’ — not that the Treasury bean counters have a clue or are any less psychopathic than the RBA and the banks, notorious for making the worst and cruellest policy suggestions in govt, and are usually roundly ignored for that reason anyhow.
Anyhow, that’s how dysfunctional things are in the land of Oz around the Lib/Lab banking debate. Prof Michael Hudson on a recent visit to Australia expressed amazement and dismay over the lack of connection between treasury and the RBA and how mechanistic and inhuman their operations were. Not to say that 139 bank closures, millions of foreclosures and punching a hole through the economic space-time continuum in the US is working out any better…
P.S. for the rationale behind the ASX’s permanent ban on naked shorting, reference the ‘Deep Capture’ website — where it appears certain operators in the US deliberately start writing extra shares on ailing companies without their knowledge or consent, often on overseas stock exchanges, in order to amplify the earnings from making short plays. They appear to target certain companies with the strategy which also involved collusion with some Wall St journalists to talk down a particular company, and then force it into a ‘death spiral’ to maximise profits from the short position. The ASX eventually unbanned securitised short selling , but kept its ban on naked short selling in order to avoid this kind of behaviour. Naked short selling occurs when the operator fails to borrow the security, and often results in a ‘fail to deliver’ condition — AFTER all the shorting profits have been taken by the operator. Naked short selling was made illegal in 2008 in the US also, but it still occurs under some circumstances. (Deep Capture refers to deep regulatory capture by the vested interests on Wall St.)