Battling For The Big Four


The hills are alive with the sound of bank bashing. And rightly so. The reason is simple – the Big 4 have too much market power. This is what happens when an irresistible force — the banking lobby — meets a moveable object — the post-1960s political classes. 

What is fascinating in the current propaganda war is the range of voices rallying in support of the banks. It goes something like this: Banks have a primary duty to their shareholders. Superannuation funds have bank stocks as fundamental parts of their portfolios, so higher bank profits are good for retirees. Retirees deserve higher interest rates for their direct savings. The banks came out of the GFC virtually unscathed, so they deserve their rewards. To attack an Australian company for being successful is just pure economic insanity. Any strain in borrowing costs is the customer’s own responsibility. And so it goes.

There are the usual journalistic suspects. John Durie wrote in The Australian on 29 October: "the arrival in Canberra of a minority government created the perfect backdrop for ill-informed politicians to grab their share of the limelight."

And Andrew Cornell in the Australian Financial Review agreed on 1 November: "shadow treasurer Joe Hockey lunatic fringe ranting"; "the frame should be what went right with our system because very little went wrong". Regulation bad, deregulation good. "consumers and the economy would benefit much more from some hard work on micro-economic reform, rather than facile grandstanding."

Sue Cato weighed in in Business Spectator on 4 November: "It will be interesting to see whether the [mooted]Senate inquiry will be able to focus on rational review and reform when the lightning and thunder subsides in the current maelstrom. Australia has one of the most stable — and yes profitable — banking sectors in the world … Will it be ruled by policy or politics?"

Michael Stutchbury, writing in The Australian on 6 November defended the banks — "Minority politics has ignited a wave of populist bank bashing suggestive of an Australian fantasy land: we don’t appreciate why we avoided the global financial crisis" — and so did Malcolm Fraser (yes, him), in The Age on 9 November: "Today’s hate is of those same banks that were so necessary for economic strength and for economic recovery. We want to weaken them by forcing more competition."

Janet Albrechtsen had her go in The Australian on 10 November. The gist of her article? The banks are well serving the public interest; it’s just that they have lousy PR. Lousy PR? It doesn’t look like it and anyway, not one of the affirmations above addresses the concerns of the "bank bashers".

The notion that high bank profits should be welcomed because the Big 4 banks are a key component of superannuation portfolios is ludicrous. There was a comparable argument from Telstra shareholders (in the context of the threat from the National Broadband Network) that they had every right to benefit from monopoly profits generated by Telstra’s vertically integrated telecommunications network.

It’s about market power. Not coincidentally, that and its consequences are what the critics have as their target.

The Big 4 banks reported an aggregated $20.7 billion in profits for 2009-10 (Westpac $6.3 billion , CBA $5.7 billion , ANZ $4.5 billion , NAB $4.2 billion ) — up from $13.7 billion in 2008-09. Reporters have claimed that this sum has been inflated by much writing back of previous provisions for bad debts. The claim seeks both to rationalise the scale of the profits and to imply that the banks got through the crisis relatively unscathed because of their perspicacity.

On the contrary. Statistics gathered by the Australian Prudential & Regulation Authority (Consolidated Group Impaired Assets — B5)  highlight that the bad debts bogey hasn’t gone away. It is true that $10.3 billion of bad debt provisions was returned to balance sheets in 2009-10 as "cured loans" ($6.8 billion for 2008-09). But $25 billion of "new impaired assets" was provided for ($33.4 billion for 2008-09), and $11.6 billion of impaired assets was written off ($6.9 billion for 2008-09). The latest Financial Reports for all Big 4 banks highlight that bad debt provisions increased (albeit not dramatically) as a percentage of loans and of equity.

See, it’s all about market power.

Ralph Norris, CBA CEO, claims: "The fact of the matter is I’ve got to run this business on the basis of it being sustainable."  No. CBA’s rate of return on equity in 2009-10, in spite of its losses during the crisis, was 18.7 per cent. Most industrial company managements can only dream of such returns. Gonzo journalist Mike Carlton cuts through the blather: "… in fact they are a protected species marching lockstep in a cosy oligarchy. … They stick up rates and gouge for fees and charges for the same reason that dogs lick their testicles: because they can."  Carlton can express the self-evident because he doesn’t have the dilemma of financial journalists self-censoring their script for a management cowed by bank lobbying.

In 1959-60, the gross income of financial corporations as a percentage of total corporate income was 5.8 per cent; as a percentage of total business income, it was 2.4 per cent. By late 2006, the percentages had risen to 20 per cent and 15 per cent respectively, and have fluctuated around those levels since. This trend of "financialisation", with occasional blips, has been ever upward.

The Big 4 banks now practice "administered pricing". This strategy was formalised by Du Pont after World War I when General Motors, over which it exercised control, was in danger of collapsing after a post-war recession. The banks price products so as to deliver a required profit mass or rate of return from current business activities — a privilege available only to firms possessing monopoly or cartelised oligopoly power. Adverse effects on profits are met by a renewed pricing structure oriented to regaining lost ground. Sustainability indeed.

There has been an absence of history in the defence of the Big 4. Was their dominance inevitable?  Mike Steketee provides us with a brief account of the decline to this point.

The current dominance of the Big 4 is courtesy of uncritical deregulation, privatisation and regulatory tolerance of merger/takeovers in the banking sector. The regulatory and Ministerial tolerance of the takeovers of St George and BankWest in late 2008 by members of the Big 4 was the last straw.

Even John Hewson, instrumental in pushing for the Campbell banking inquiry in the late 1970s when advising Treasurer John Howard, has had enough. He wrote in the Australian Financial Review on 13 August: "As one who has spent much of his professional life fighting for deregulation and reform of our financial system to give our banks many of the freedoms and structures that they now enjoy, I am embarrassed that I have contributed to breeding this sort of arrogance and behaviour."

Although retail mortgage rates dominate the public debate, small business is particularly hampered by banking concentration. Australian journalist Jennifer Hewett has rightly questioned the differential rates faced by small business/farmer borrowers (SMEs), cross-subsidising other sectors. But Hewett misses that the SME rate differentials (and penalty rates in particular), supposedly linked to greater risk in SME lending, are not functional. SME loans always involve the taking of security over business and family assets.

The Big 4’s discriminatory treatment of SMEs is simply because they can. For example, the CBA’s general provisioning for impaired assets for 2009-10 was $732 million for loans of less than $1 million, $1,573 million for loans between $1 million and $10 million , and $2,911 million for loans greater than $10 million.

The asymmetry of power relations between a big bank lender and a SME borrower is profound, which explains why bank malpractice against SME borrowers is pervasive. The abolition of the specialist Commonwealth Development Bank in mid-1996, following the final privatisation of its parent, was a significant blow to reliable SME credit provision. Likewise, the gobbling up of St George as it was about to become a significant force in SME lending.

Banks and their supporters want to ignore the fact that banking is a special industry because fundamental to the economy. Banks operate by the grace of a government licence, which gives the banks literally the licence to print money. Banks serve public functions, making their regulation imperative. Banks have always wanted to exploit their charter while eschewing the associated responsibilities.

If monopoly profits is bad in banking, so also is uncontrolled competition. Crikey’s Bernard Keane highlights a crucial distinction.  Bank shareholders (and power-driven CEOs) want their banks to be growth stocks, but the public interest is served by their being yield stocks. Expanding overseas from the captive Australasian markets (pursuing growth) enhances the risks; ditto any move from commercial banking into investment banking.

The ANZ’s Mike Smith and the CBA’s Ralph Norris claim that regulation threatens to put Australia in the camp of Chavez’s Venezuela and the former Soviet Union. That these individuals of such singular arrogance, ignorance and ethical ineptitude should preside over the commanding heights of our economy is representative of why a dramatic rethink of financial re-regulation is urgently needed in Australia.

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