Poor old Wayne Swan! He may be the world’s best treasurer but he can’t get the big banks to be nice to consumers.
It’s a bit like the world’s best dad asking a family member to behave or be nice to the other members of the household. And that’s the point. We have four big banks that, despite being valued members of society or the Australian “family,” are being self-centred and not very nice to consumers or the Australian household.
We then have a federal Treasurer and PM who are supposed to be guardians of the Australian household or economy being ignored by the big banks. And that’s after the federal Treasurer has been so nice to the big banks.
Let’s not forget that Swan allowed the big banks to knock out the competition. It was Swan that approved the big banks acquiring St George and BankWest. It was Swan that stood by and let the big banks acquire or neutralise smaller competitors. It was Swan that was slow to move on any reform packages to ensure that the big banks were nice to the Australian household or economy.
Those with a keen memory will remember that Swan’s first so-called banking reform package was a fizzer and his second bank reform package was too little too late. By then the four big banks had well and truly become too big to fail. The big banks had become so profitable and so powerful that they could do what they want and be excused by a growing number of supporters and apologists.
Yes, the big banks have their critics but the free market theorists have been quick to run the media line that we should leave the banks alone. The free market theorists keep telling us we had no right to tell the big banks how they should behave.
No surprises from the free market theorists or other apologists for the big banks. They despise or dismiss government intervention unless, of course, there’s a global financial crisis and they all line up for government handouts, support and guarantees.
So free market theorists always seem to defend whatever the big banks do, with the theory being to let the big banks make record profits whenever they can and the practice being to expect the government to look after them when there’s a global financial crisis.
In those self serving circumstances it would not being surprising if the struggling members of the Australian family thought that there was some hypocrisy in the way the defenders of the big banks presented their arguments.
Now, obviously, any debate about the big banks is likely to stir up some emotions. No one should be surprised at the growing community anger given the banks are being so self-centred. More precisely, while the shareholders are reaping the benefits of record profits by the big banks year after year, the rest of the Australian household is doing it really tough.
While there can be no doubt that all Australians want strong and profitable banks, that’s a completely different situation to where all the big banks make record profits every year and the bank CEOs keep getting bigger and bigger remuneration packages.
Yes, record profits may occasionally be made by one or two players in a market because of superior management skills, but when all the big banks are making record profits every year there’s something more than “superior” management skills going on.
Here it’s the failure of competition to stop the yearly record profits. Effective competition would put pressure on the big banks and while allowing them to be profitable where they made the right commercial decisions. It’s clear that effective competition would prevent the big banks from being super profitable.
So it all comes down to the level of effective competition in a market. Here we are not talking about any type of “competition.” We had reckless competition in other parts of the world in the lead-up to the global financial crisis. In Australia we have been spared the dangers of reckless competition because of our strong prudential regulation of the banking sector.
Clearly, effective competition refers to the strongest level of genuine competition possible within our system of prudential regulation. It’s the intensity of the competition that’s critical and that depends on the number of effective competitors in the market. So the greater the number of effective competitors in a particular market the more intense the competition in that market and the better off consumers will be.
That’s why we need strong competition laws. At the moment our competition laws let through too many mergers and acquisitions which drastically reduce the level of effective competition in key markets. At one point the ACCC was approving around 97 per cent of mergers and acquisitions it considered. That meant that only very few mergers or acquisitions were being stopped by the ACCC.
While previously the ACCC was more inclined to approve as many mergers and acquisitions as possible, one can only hope that the new ACCC Chairman Rod Sims will not be so accommodating of big end of town players and their advisers when it comes to dealing with mergers and acquisitions.
Why is it important to have effective competition in the banking sector? Quite simply it’s because it leads to lower effective interest rates and it gives the Reserve Bank greater control over monetary policy.
A fundamental weapon in the fight against inflation or a weakening economy has always been control over Australia’s interest rate policy. And that’s formally been in the hands of the Reserve Bank and its board for some time.
The theory and practice in recent years has generally been that the Reserve Bank determined the direction of the official interest rate with a view to giving the economy a boost or applying the brake.
The problem is that if the big banks continue in their determination to set their interests separately from the official interest rate, then the ability of the Reserve Bank to effectively implement monetary policy is significantly weakened. That’s more bad news for Swan.
So Swan has every right to talk and act tough with the banks. After all he has given them so many free kicks that he would be right to think that big banks would return the favour by being nice to consumers, small businesses and the rest of the economy.
With the big banks now more about taking from than giving back to society they clearly need to be put in their place by Swan like any guardian would do to any selfish or disrespectful member of the family. Over to you Mr Swan.
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