Level playing field for big banks may be more level than for small fry

by Michael West | Dec 8, 2011 | Business

Are the 'The Big Four' banks playing by the same rules?Are the ‘The Big Four’ banks playing by the same rules?

IT MAY be that Treasury has secretly whispered to the credit ratings agencies that, in the event of a global crisis, it may save the big banks but let the little ones go. But we have no evidence of this. Rather, the public utterances on the subject of bank rescues suggest there is a level playing field.

And if this is correct and the Commonwealth stands behind all banks equally, then Standard & Poor’s and its latest ratings methodologies are flawed.

First to the evidence of sovereign support. Reserve Bank assistant governor Guy Debelle told the Risk Australia Conference in August 2010 that the ”institutional framework determines the point at which the public sector needs to be called on. But in terms of insurance of the system as a whole, at some point, it has to be provided by the public sector.”

Mr Debelle said he did not believe it was ”socially optimal for the individual entity to fully insure itself”. This would be too costly. Banks would have to hold too much capital and liquidity, he said, to survive in the event that another global financial crisis-type event were to occur.

Despite this, and despite the government jumping to the aid of the banks with funding and deposit guarantees during the financial crisis just as a couple of the smaller players were getting the wobbles, S&P has just downgraded Suncorp and Bank of Queensland.

Its rationale, however, is the interesting bit. According to S&P, the second-tier banks have a greater systemic risk. Under its new criteria the agency looks at the likelihood of government support in an ”Armageddon scenario”.

And it appears to have adopted something of a ”one size fits all” approach to second-tier bank risk in Asia. The government here, it is assumed, will be more likely to bail out the big four banks before the smaller operators.

But is systemic risk this simple? While more people get hit if a big bank fails, surely the loss of confidence from any failure warrants a level playing field. Surely the configuration of the banking industry in Australia makes it essential that small banks receive equal treatment.

Already the big four control more than 80 per cent of the mortgage market. Were the small banks allowed to fail and the big banks bailed out, it would deliver even more market concentration and power into the hands of a few. It would be competition madness.

So it is that the ratings agency has either been told on the quiet that small banks may not be bailed out, or it has misread the governance landscape.

The other possibility is that the agency deems the sovereign credit is too weak to underpin the whole banking sector. Given the big banks own most of the liabilities, this is unlikely.

In any event, the policy settings already disadvantage the smaller banker as far as the wholesale funding guarantees go. The tiered system of fees means the regional banks pay more for sovereign backing on bond issues but their enhanced sovereign credit still gets ignored when they raise money offshore. So they get pinged twice on bond issues.

The mollycoddled bigger banks, eager to protect their profits and executive salaries, are yet to blink. The time that has already elapsed proves they are keen to pass on nothing, or at least as little as possible. And day three in the standoff will bring more public opprobrium.

But as long as it is targeted at the sector rather than the individual bank, any calumny is capable of being absorbed.

Their behaviour sits right at the edge of price-signalling. As none have yet foreshadowed their intention and continue to hold off, they will be careful not to all move at once so as not to suggest they are moving, anti-competitively, in concert when they do announce something.

In the meantime their collective silence amid this ”sit tight and do nothing” strategy is as good as any nod or wink.

 

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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