The bosses of the big four banks fronted a parliamentary inquiry last week. What for? Well actually nobody really knows.
Of course there is a shopping list of consumer gripes that have led to this inquiry. Such items include the banks not passing on Reserve Bank interest rates cuts, obscenely low term deposit rates, and ‘bad behaviour’ (including allegations that banks aren’t playing fair with services like insurance and the like).
But wait there’s more. There are also question marks around the very culture within the banks. Traders within the banks’ treasury departments have been accused of rigging markets, and doing it in a ‘cowboy’ manner.
The well-payed CEOs of the banks fronted the parliamentary committee and basically said ‘yes, we’ve made some mistakes, we can do better, but there’s nothing seriously wrong with us’.
That is of course true, but it doesn’t really address why we’re having a banking inquiry in the first place.
A banking analyst contact of mine, Martin North, from Digital Finance Analytics, called the whole expose a “sideshow”. And that just about sums it up. The right questions were raised and the predictable answers were given, but the real issues weren’t touched on, nor were they resolved.
The big issue, as far as Martin North, and myself, are concerned is competition.
Competition – or lack thereof
The lack of competition in the banking sector helps explain the record profits in the billions of dollars. It also helps explain why you won’t get the full benefit of the Reserve Bank’s interest rate cuts.
The fact is Australia has a concentrated financial sector. Four big commercial banks control the financial services sector. In addition, there’s a lot of double up in terms of the services they provide, including wealth management and insurance.
The insurance space, and the questionable culture within it, was exposed this year. A “sales culture” -- where banking employees simply want to achieve sales targets, sometimes at the expense of common sense (as exposed in the CommInsure scandal where the bank was shunning payouts that seemed fair), has led to an increasing amount of community anger directed at the sector.
Who’s the boss?
So if the big problem with the banks is the lack of competition, and the “moral hazard” that’s created by an awareness that they’re too big, or too important, to fail, then who’s responsible for fixing that?
The answer is no one knows! Quite literally! It doesn’t really fall under the Australian Securities and Investments Commission’s charter, nor does it fit onto the Australian Prudential Regulation Authority’s to-do list. And the Australian Competition and Consumer Commission isn’t the right agency to deal with it either.
That’s probably why there have been calls for a banking Royal Commission – an independent body to tackle the sector’s festering problems.
Whatever scrutiny eventually falls on the industry, the banking sector has now become political. Make no mistake about it. There’s growing community anger about their shenanigans and the public wants to see some blood.
There were some ‘apologies’ from bank chiefs this week including what seemed to be a very rehearsed line from one CEO who said something along the lines of, “we identify problems, we fix them, and we learn how to improve”. The problem of course is that the problems appear, and I want to emphasis “appear”, to be systemic. One politician described the responses he was hearing as just “spin”.
Now bank bashing aside, it’s important to take a step back and look at these Australian financial institutions objectively. Why do certain employees behave the way they do?
I’ve worked for one of the big four banks and I can tell you it’s an incredibly competitive environment or culture. The hurdles just to gain entry into the bank are sizeable and, once you’re in, you’re subject to strict performance measures.
You see banks aren’t charities. They’re hungry businesses. They want your money and they want to make money off your money. There are few “sensitivities” in this equation. Sure they have a responsibility to the community, but their top priority is the shareholder. Second to the shareholder are the bank’s customers, and then the broader community.
The cliché rate cut
One of the biggest pet peeves of the banking sector (from the broader community) is that the big four haven’t been passing on the full 25 basis point interest rate cuts from the Reserve Bank. One bank chief told the inquiry this week that the Reserve Bank doesn’t really dictate interest rate decisions for the commercial banks and that a bigger determinant of interest rates was the rates on offshore wholesale markets.
Be that as it may, I’d suggest that the pressure to pass on interest rate cuts to customers will only grow in the coming months as the Reserve Bank considers its position. Eminent economist, Warren Hogan, told me last week that the “level of crisis” around the Australian economy was not fully understood and that rates would stay “very low for a long time”.
The pressure on the banks isn’t going to let up.
Not all bad
It’s important to recognise though that the line the banks have been running in recent years: that ‘healthy profits produce stronger economies’, is not actually that far from the truth. As former Treasurer Peter Costello recently reminded us, it’s far better to have a very profitable banking sector than a banking sector that’s in financial trouble.
The problem at this point is that they’re considered a little too profitable. Banking analyst Martin North described their current profits as unreasonable.
The bottom line is that banks’ profits are being squeezed by all sorts of extraordinary forces at the moment. The industry though is as tough as they come, and those high flyers at the top are going to do everything in their power to keep those “returns on equity” as high as possible.
Last week’s Banking Inquiry was the sort of inquiry you have when you’re not having a Royal Commission. The bankers have won this round, but I suspect the political pressure will remain, especially if the banks continue to prosper as the economy falters.
David Taylor is a journalist with the ABC. Before taking up a position with the ABC, David was a financial markets analyst and economics commentator. You can follow him on Twitter: @DavidTaylorABC.