At a time when the coal price is crashing, financing the rapid expansion of the fossil fuel industry in Australia seems like a big bet on a bad hand. The economic hurdles, along with pressure from environmentalists and scientists around the world, has led Deutsche Bank, Royal Bank of Scotland, HSBC, Barclays, Citibank, JP Morgan and Goldman Sachs to rule out lending to the coal and gas expansion alongside the Great Barrier Reef.
Australia’s big four banks have not made any such commitment. The official line seems to be in step with the Government’s. Most of us hear the Prime Minister say “coal is good for humanity” and cringe with how out of touch he is with global political sentiment. Especially given that he stands in stark opposition with the views of leading economists, scientists and world leaders.
Indeed the Secretary General of the United Nations has, during the last fortnight, pleaded with financiers to pull back from lending and investing in fossil fuel projects.
If you’re confused over why Australia’s big banks are ignoring this advice, the reason is simple. Australia's banks rely heavily on their relationship with Government and they don't want to do anything to upset the apple cart.
A recent report from the Bank for International Settlements found Australia’s major banks are the most profitable in the developed world. The source of the profitability of the Big 4 (approximately $29bn last financial year) is in large part the huge gap between the cost of funds to the banks and the price they get for their funds from the loans they issue.
For a new home loan, some estimate that the Big 4 banks earn a whopping 40 per cent return on their equity.
Banks are required to hold different levels of capital, based on the types of loans they provide. Right now, there’s a significant gap in how much regional second tier lenders are required to hold as compared with the Big 4. The result is that the Big 4 get an easier ride than the regionals.
There’s no doubt the big banks profit from a close relationship with the government. But there’s a cost to their low risk, high margin businesses. And with the government barracking for the perpetual expansion of fossil fuels (and attacking institutions that question the government’s moral and economic wisdom), protecting that relationship means being stuck in the middle with the world’s leading scientists and economists on one side, and Tony Abbott on the other.
The Big 4 are backing the Government’s fossil fuel frenzy at the same time as changes to banking regulations are looming on the horizon. The state of the playing field is being examined by the Murray Inquiry into the Australian financial system. The inquiry was established to explore ways to lessen the impact of any future downturns on Australian taxpayers and the broader financial system.
It looks almost certain that in the coming weeks the Murray Inquiry will recommend the Government remove the advantages the Big 4 enjoy over the rest of Australia’s 69 banks.
The Big 4 don’t want the Government to do that. And they won’t let their profit margins go down without a fight.
Last Friday, the reliably aggressive CEO of ANZ, Mike Smith, boasted of his bank’s record $7.1bn full year earnings. He also took the opportunity to declare that if the Government wanted a safer banking system, the big banks will just pass on any costs they might incur straight to their customers.
Mr Smith threatened consumers with a rate rise on home loans of around 0.5 per cent, or about $1,000 a year on a $250,000 household mortgage.
It is understandable that Australia’s biggest banks would rail against taking action on either climate change or banking regulation reform. Their view appears to be that it is good politics to subsidise the fossil fuel industry's bad loans. And the fossil fuel industry is full of bad investment opportunities.
The price of coal has plummeted to a five-year low and, despite all assurances that everything is under control, the industry continues to shed its workforce as it braces for the end of the boom.
The latest recommendation by the IPCC, to move to 80 per cent renewables by 2050, makes for troubling hearing. UN Secretary General Ban Ki Moon’s message for those thinking about financing the expansion of the fossil fuel industry could not have been more clear: “Reduce your investments in coal the and fossil-fuel based economy”.
Many Australians are understandably angry about the proposed coal and gas port expansion alongside the Great Barrier Reef. Despite warnings from scientists, including in the recently released IPCC report, that it’s time to turn away from the fossil fuel industry, the Queensland and Federal Governments have waved through environmental approvals like they’re going out of style.
If Australians want to convince the Big 4 banks not to fund the rapid expansion of the fossil fuel industry along the Great Barrier Reef coastline, consumers will need to take the fight right up to the Big 4.
In doing so, they’ll have the UN Secretary General on their side.
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