18 Nov 2010

Battling For The Big Four

By Evan Jones
There's plenty of bank bashing going on but it's being matched by a chorus of bank defenders in the media who are obscuring the case for financial re-regulation, writes Evan Jones

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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David Skidmore
Posted Thursday, November 18, 2010 - 11:46

The hysterical rubbish about creeping communism when regulation of banks is mooted is, well, hysterical rubbish. Other industries such as alcohol, tobacco, firearms and pharmaceuticals are considerably regulated in well-known socialist regimes like Australia and the USA. Those industries still make profits. Given the banks have captive customers (we all need money storage and to spend the stuff) a bit of regulation won't kill them.

Posted Thursday, November 18, 2010 - 13:36

It's all very well to talk 're-regulation' - but what, may I ask, are the author's actual suggestions on this front?

The biggest mistake made by the government in recent times was it's failure prevent the consolidation of retail lenders during the GFC. What did they think would happen if they extended a government lending guaruntee to just some players in the market?

The same happened with other financial products as well, prompting some commentators to argue that Australia is now at higher risk of financial instability because there is now a greater concentration investment banking activity within our retail banking sector than before the GFC. The talk in other parts of the world has been about greater seperation of the two.

Smart prudential and competition policy combined with policies that make it easy for smaller lenders to compete with the big banks is the ticket.

Targeted regulation around disclosure, fee structures, and other opague and nasty practices would be welcome. But this is far cry from 're-regulation', something we should be wary of.

Australian banks might be making larger profits than is ideal but they're also willing to lend us money. Let's not forget that. Unless of course you're also saying people should stop buying homes, cars and starting businesses.

David Skidmore
Posted Thursday, November 18, 2010 - 14:27

I think there is a inherent problem that most people have to buy homes (and often cars) with a loan (ie: someone else's money). Most people don't buy takeaway food by giving Macas a 10 percent deposit for a hamburger and pay it off after a period of time. I wonder could the industry cope with its customers buying its goods that way?

Buying a house means not only paying outrageous amounts of money you haven't earned for overpriced dumps to the housing industry - it also means the banks receive a captive pool of customers.

I actually have no problem with banks making huge profits in the way I have no problem with the diamond industry making huge profits ie: okay so long as the profits are made from the megarich. When low-income people are exploited that's when I get angry.

Posted Thursday, November 18, 2010 - 15:18

The media have found a good outlet for their bashing habits, knowing that they have the masses on the side. So, both sides over-react.

The banks are not doing themselves a favour with some of the statements coming back, eg talk of communism.

Rationality needs to be brought into the debate. Banks need to explain why the profits are necessary, if they are necessary, and they have to explain it in simple terms for people to understand. Only then can we move forward (this expression again!) and reach a satisfactory resolution.

Personally, I like banks to raise interest rates. As a lender and responsible financial manager of my meagre resources my interest rate will also go up. Borrowers need to understand that. After all, banks are commercial businesses, not charities, and profits are not made to be distributed to those who are financially irresponsible.

Nor should the banks be blamed for high interest rates. They are not high by my standards. Just look at what they were in the 70s and 80s. And just look how hard it was to get a mortgage from a bank in the 70s, at a reasonable rate, when banks were nationalized. Only too many obtained their mortgages from Mutual Societies at much higher rates in those days.

Nor do banks drive up the price of houses. That is done elsewhere in the market. Blame it on developers and immigration as well as ridiculous expectations of buyers (and their megasized houses).

Posted Saturday, November 20, 2010 - 20:12

The issue is not one of whether or not profits are desirable within he banking industry, the issue should be HOW those profits are generated.

Profits, by themselves, are what funds and finances social spending. Destroy profits and you destroy the source of funding for social programmes.

To quote Winston Churchill, " It is a socialist idea that making profits is a vice. I consider the real vice is making losses."

The problem is not profits, it is what society does with the tax revenues earned from profits. Socialist governments are not good with money, why? because they really do think money grows on trees.

"The surest way to ruin a man who doesn't know how to handle money is to give him some"- George Bernhard Shaw

The author of this piece touches on the very crux of the matter with this observation that "Banks operate by the grace of a government licence, which gives the banks literally the licence to print money"

That single issue, and not all the ancilliary leftist or rightist political rubbish is the real crux of the matter. "A licence to print money", and not whether profits are a vice, or whether banks earn too much profits but rather HOW that profit is generated in the first instance, and HOW that profit is spent once it has been earned.

To quote Roland Baader in "Freiheitsfunken" (Sparks of Freedom), who writes - "... The medieval alchemists’ belief that it was possible to create gold out of lead was a show of level-headed reason compared with the modern delusion that money can be made out of paper..."

Licence to print money? What the banks produce is not "money", it is debt. Money, on the other hand, is a store of wealth and a medium of transacting.

What we have is a currency, a medium of transacting based on debt. Wealth cannot be stored in debt.

The debate has become distorted as a result of the failure of most to understand the simple distinction between these concepts.

We should heed the words of one of the world's most famous bankers, Sir Josiah Stamp, who wrote:-

"Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again.

However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in.

But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits."

The bottom line? Bankers "create" money, at our own peril and to our own great immiserising cost as a society, and "profits" discussed in this piece are nothing but a triviality in the grand scheme of things.

Posted Sunday, November 21, 2010 - 00:55

Regulating can be an anathema for attracting competition. It would be unusual for the government to try to restrict or to discourage competition. The number of foreign financial institutions competing in Australia's home loan market a few years ago is as astonishing as the way that the American Real Estate Crisis and later Global Financial Crisis have taken these lenders away.

Fixing the home loan interest rates low will mean that fewer lenders are interested in lending and the banks are only interested in lending to those who appear most profitable.

Marga has a point about increasing home prices. The First Home Owners' Grant was intended to inflate prices. The rising home prices meant that voters pleased with their growing wealth voted Liberal. Allowing people to borrow the entirety of their home loan also gave them more to spend on land. These make the effect of interest rate rises now more severe than they were under Keating (as Treasurer or Prime Minister).

There would be a case for regulating how much money can be lent for buying real estate and restricting any grants to a class of newly built homes. Inflating house prices is only good for buying votes. Restricting how much institutions could lend might discourage some competition but those in the market would be more confident that it was safe to lend. However, arresting inflation could be giving votes of recent home buyers away.

Posted Sunday, November 21, 2010 - 10:22

After many years of observing Banks and being part of the borrowing community
I for one am sick and tired of the rhetoric.

The simple facts are;
These banks are making huge profits and have always for the most part.

(A little less profit = more social & community gain ; that would be Us folk )

We the community have put up with this socially detrimental unsustainable aspect of our lives for a very long time.
We having said nothing barring the occasional media lip service outbursts that "makes a good news story "

We have done nothing but pander to the desires of ourselves and the open arms of the banks. Shoulders to busy to the grindstone or chasing fools gold.

Why ? perhaps our own Moral corruptions are holding us back.
Maybe our owning of a few shares helps console us, they have been great and balance out the odds and the seriously expensive costs of borrowing money, or do they have we just sold our souls for very little.

Time for a change ?
Well Lets do something about. leave in droves, I for one am seeking alternatives, be that reducing borrowings and or moving to an ethically inclined monetary stance.

I have had enough

As much as the capitalists squeal about intervention
The capitalist view and trend was to sell off state owned assets for a song
Then to profit carrying to monopolize the market.

How well this has all worked? a total collapse. Governments and communities held to ransom for basic requirements by companies which are no better run than went government run . And who has suffered the Banks ?

Oh hang on, there was a few changes
We sold the Farm
We now rent it back at an exorbitant rate
Because it only employs half of us we have to pay more for the same thing
That once supported more of us we can't contact anyone to discuss this because of the aforementioned staff reductions etc ..

we need a peoples bank that is guaranteed by government, we need it now.

Not a privately owned banking institution that the government bails out when their own dubious practices and greed have led them awry.

The GFC is a fine example of Capitalism's failure and is being fixed by the best means practical, Socialism as seen in the US . How the worm turns
(Noting that the previous US administration has ham strung the States for very longtime)

For most of us borrowing is a more prominent prospect life than collecting interest.

Our homes are a security that is worth banking on Not gambling on .
We need places to live
A not profit bank government owned and run properly can't be so hard to organize.
Start one and i'll be there. ... And don't get me started on the Private Health insurance system versus Medicare