Banks can complain all they want but Hockey’s right
Our major banks are not like other businesses.
If a boat builder in Taren Point, or a plastics manufacturer in Chipping Norton or a motel owner on the Central Coast of NSW gets into trouble, there will be no taxpayer bail out. There will be no funding guarantee to support their continued access to credit. There will be no Reserve Bank to act as their own on-call lender of last resort to see them through their troubles.
The GFC proved that our four big banks are too important to fail. They know it and the taxpayers know it. The banks may be a legitimately protected species, but that does not give them a license to be precious, striking out at anyone who would dare raise questions about how they do business.
Our major banks have a special relationship with taxpayers, whether they like it or not and whether they ask for it or not. We effectively have the situation of heads, the banks win, and tails, the taxpayer loses. In economics jargon, “moral hazard”.
The undeniable reality of this special relationship must be respected in the commercial decisions taken by the banks.
This means being mindful not to gouge the market by lifting rates beyond movements in funding costs, particularly rate movements by the RBA.
Both the RBA and Treasury have made it clear that funding costs for the banks have now stabilised and that banks are charging proportionally more today than before the GFC. The difference between the RBA cash rate and mortgage rate has blown out from a 1.8% difference in November 2007 to 2.9% difference in October 2010. For a $300,000 mortgage, that means an extra $220 per month.
Small business have fared worse, with even higher funding costs and reduced access to capital, while the banks focussed on expanding their market share in the bigger home mortgage market as smaller competitors fell by the wayside, cutting competition for new mortgages to record lows.
The banks’ decision to increase their margin over movements in the RBA cash rate is a direct cost on small business and living expenses for homeowners.
Access to capital at affordable rates is critical to enabling business to invest in their plans to boost their productivity, employ more Australians, and generate sustainable increases in real wages for workers.
Equally, it must be recognised that decisions taken by banks to engage in risky non-core activities, will ultimately be underwritten by the taxpayer, if the deals go sour. There can be no blank cheque for such decisions. It is appropriate they come under close scrutiny.
And contrary to Julia Gillard’s facile claims that this is economically irresponsible, the Coalition’s nine point plan is, in the words of respected Harvard and Melbourne University economics professor Joshua Gans, actually “very consistent with mainstream economic thinking on the subject.”
The Coalition’s position on banking is at one with the views of Reserve Bank Governor Glenn Stevens, who recently argued, “The finance industry…needs to seek to be less exciting, less ambitious for growth, less complex, more conscious of risk and more responsible about where those risks end up, than we saw for the past decade or two.”
The Coalition’s nine point plan makes specific and sensible suggestions to encourage greater competition and transparency in what remains, by design, a highly oligopolistic, or concentrated, banking sector.
There is no plan to legislate interest rates. There is no plan to introduce new taxes.
The plan includes commonsense proposals, including: ways to prevent banks from colluding on price-setting, which the ACCC has raised as a concern; encouraging the bank regulator, APRA, to go further than it currently does in examining whether the banks are taking on unnecessary risks; formally mandating the RBA to publish analysis on the banks’ profitability to facilitate debate and improve transparency; supporting smaller lenders to encourage competition by improving the liquidity of the securitisation market; giving small business a fairer go on their loans when they’re putting up the family home; and asking the big questions once again about our banking system to take up the lessons from the GFC, as almost every other country has done.
For the banks and the Government to criticise the Coalition’s nine point plan as an assault on free markets is clearly hysterical. For the government it is also outrageously hypocritical. If the banks operated in a free market, were allowed to fail, and received zero taxpayer support, we would not be having this debate. But the banks do not: they function in a highly subsidised market, where the taxpayer serves as the ‘insurer of last resort’.
In March 2001 Shadow Treasurer Simon Crean and the Shadow Minister for Financial Services and Regulation, Senator Conroy, launched Labor’s plan to legislate—yes, legislate—a social charter with the banks on service delivery, operations, banking products and marketing, with the threat of a levy on banks who failed to comply.
At one point Senator Conroy got so excited he issued a statement just prior to the 2001 election saying “the Howard Government is condoning the blatant profiteering by the major banks by refusing to act on their failure to reduce interest rates.”
The current Treasurer, Wayne Swan also joined fray after the policy launch stating “if the Prime Minister were fair dinkum about social obligations he would take some leadership on this issue. He would step up to the plate and say to the banks enough is enough, it is time that we established a social charter to define banks obligations to the community”.
As Treasurer, Wayne Swan has handed out the most generous taxpayer support for our major banks in our nation’s history, and secured very little in return. The biggest beneficiaries have been bank CEOs and shareholders. Well Wayne, it’s time to step up to the plate and support some commonsense policy.
Joe Hockey has shown the way.
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