“Our four big banks never stopped nagging the Commonwealth government to permit only two. When I became treasurer, on day two, the NAB visited me wanting to buy the ANZ. AMP visited me on day three wanting to buy Westpac.“ – John Kerin, in Rodney Cavalier’s newsletter last November.
It is rare to get a decent insight into the back-room dealings between government and big business. This observation from former treasurer John Kerin confirms all suspicions: bank lobbyists are forever roaming about Canberra leaning on politicians and perverting democracy by exacting undue influence over government policy.
The Abbott government has put this influence in stark relief in recent times by winding back the Future of Financial Advice (FOFA) reforms. Dumping FOFA is hardly in anybody’s interest, except for the big banks that control 80 per cent of the financial advice market. They nagged for the repeal of FOFA and they got everything they nagged for.
The four pillars policy – which bans mergers and takeovers of the big four banks – has been vital to the resilience of Australia’s financial system.
The reason the major banks lobby to have four pillars scrapped is because their executives stand to gain millions in bonuses and share option schemes if they can invite a takeover.
Had successive treasurers failed to stand up to the banks and their nagging and allowed takeovers by foreign banks such as HSBC or HBOS, Australia would not have weathered the financial crisis in such good shape. Same deal for mergers; the greater the concentration, the greater the systemic risk.
One of the best things about the draft Murray report into the financial system, which was released last week, is that it advocates for the four pillars policy.
The weakness of the report, though, is that it blithely ignores the systemic threat posed by the sheer size of the banks, their vertical integration and the fact that we, the taxpayers, carry their risk.
This is corporate welfare at its most blatant, yet you have to scour the Murray report keenly to find a mention of it.
This report is neither “brave” nor “bold” as the pundits dubbed it. It is a draft for a start, a bunch of observations and recommendations and, as such, is a long way from being set in stone. And, inevitably, any recommendations that challenge the interests of the banks are likely to be nagged away.
There is a spot of “challenging” stuff in there; such as suggestions the banks may have to raise some $23 billion of new tier-one equity capital (which lowers their returns on equity).
The big stuff, however, is glossed over, such as the matter of the banks being “too big to fail”, which Murray frames as mere “perception”.
“This leads to a belief that some institutions are too big to fail – that they receive an implicit government guarantee,” the report says.
This is not a “belief”, a Santa Claus or a tooth fairy. It is an undeniable reality that the banks are too big to fail. Look no further than the sovereign guarantees or the Reserve Bank’s explicit “committed liquidity facility”, a $350 million bailout fund designed for the event of a crisis.
Ordinary Australians carry the can for risks taken by our big banks. Eventually, the failure to price risk in the Australian banking sector will lead to reckless lending, extreme leverage and a hard landing. Meanwhile, it eats away at efficiency.
Murray’s other shortcoming is the brief and dismissive treatment of vertical integration: “The major banks have also integrated horizontally and vertically into other sectors of the financial system … The major banks have market power across a range of markets. However, it is not clear they are abusing this power.”
Really? What of the investigation in these pages in December that found the billions of dollars of investments held in cash by the dominant wealth managers such as Colonial and MLC were being funnelled straight into their parent banks such as CBA and National Australia?
Rather than diversifying these investments with different managers as bond and share fund managers do to offset risk and chase the best returns for their clients, the banks are exploiting people’s savings as a cheap source of funding.
Not only is this poor practice, it is arguably in breach of directors’ duties. It is a racket, yet a racket that doesn’t rate a mention by obeisant politicians and regulators or by the Murray report.