A bold prediction for Melbourne Cup Day - interest rates may or may not go up today. A slightly bolder prediction is that the next bank which argues it has to increase its standard variable home loan rate, without any corresponding increase in the Reserve Bank’s official cash rate, will face a backlash of unprecedented scale. Equally, the next banker who pops his head up to say that public anger over fees and charges is a media beat-up will have his head bitten off.
There are about 20 billion reasons why Australia’s big four banks have run out of goodwill. Australians are generally a pretty level-headed lot and people understand the need to have a strong banking sector.
They’re grateful that the banks are run prudently and conservatively. They know what has happened in other western economies over the past couple of years, where the job has fallen to the taxpayers to bail out less cautious financial institutions. They also know that a strong banking sector, which makes a legitimate profit, adds to our collective long-term wealth through the shares that are held in our superannuation funds.
But Australians also know when they are being taken for a ride. The staggering multi-billion-dollar profits unveiled by three of our big four banks so far this past fortnight – Westpac is to follow this week with a forecast $6 billion bonanza – have done serious tactical damage to the banks. They have killed the banks’ argument that it has been necessary to stump for interest rate hikes when the RBA has itself not increased the official cash rate. They have also shone a light on the role which penny-pinching fees and charges have played in boosting bank profits – fees and charges which, funnily enough, are often applied at a similar rate and with the same frequency by these four alleged competitors.
A combined profit of some $20 billion between these four institutions doesn’t look legitimate. It looks like greed. And as the bank chiefs moan about the treatment they are getting from the public and the politicians, it’s becoming obvious that they should set a miniscule portion of their mega-profits to one side and get a bit of public relations training, as right now they are losing the battle for respect and understanding.
Commonwealth Bank CEO Ralph Norris has said the debate surrounding bank profits and interest rates is “not healthy”. It’s certainly not as healthy as the CommBank’s bottom line. The most outspoken of the bank bosses, ANZ CEO Mike Smith, has on dismissed calls for an inquiry into competition between the banks and their fees and charges, and rubbished any suggestion that the banks should somehow be prevented from increasing interest rates at their will.
Smith had this to say on the ABC on Sunday:
“This idea of actually imposing an interest rate regime, looking at further regulating the banking industry, and really taking it back to an era that is long gone…it was all rather strange stuff and just very anti-reform. The economy needs further reform.”
Any banker who thinks in the current climate that banks should be freed up even further to charge whatever they like is seriously out of touch with normal Australians.
There is also something dicey about Smith’s argument that this current debate about the banks is about legislating to control interest rate movements. To suit the purposes of his argument, Smith is deliberately selecting one tiny and poorly-explained portion of the initial attack which shadow treasurer Joe Hockey made on the banks, which was distorted and amplified by the Labor Party for political ends.
The truth is Hockey did not actually say that government should re-regulate the banking sector to tie its hands and prevent such increases. He might be a populist on this issue, but he is not advocating socialist intervention.
Much has been written about the politics behind Hockey’s rhetoric, and how it has given some ammo to his detractors within the Liberal Party. This is all a bit of a side issue. The banks would probably love to see Hockey rolled by the likes of an Andrew Robb or a Malcolm Turnbull. Whether that happens or not is immaterial for the standing of the banks. Hockey’s fortnight-long assault against the banks has got the issue into the headlines; more importantly, it has made the Government realise that it must take seriously this public disquiet over the nature of the big four’s mega-profits.
To this end the Government has won some much-needed breathing space with the Senate voting to support an inquiry into banking competition as well as bank fees and charges.
Any future populism of the Hockey kind, or the likely continuation of anger on talkback and news websites, can be countered with a Government response that the Senate is examining the issue and will report within a few months’ time.
One of the best explanations I have seen as to why the inquiry should be held came not from a grandstanding politician but an academic at the Australian School of Business at the University of New South Wales, business law lecturer Michael Peters.
Peters says quite simply that the bank funding guarantee, introduced by the Rudd Government to protect savings during the global financial crisis, had the effect of distorting the market by strengthening big banks at the expense of smaller lenders.
“The wholesale bank funding guarantee was too expensive for most of the smaller banks, and forced them to stop lending, while the big four made major gains in market share. The top four banks now have over 90 per cent of personal and housing lending. They also have about 80 per cent of deposits. As a result they can cherry pick borrowers and will look very carefully at a customer’s assets when they apply for a mortgage. They are also sending small and medium businesses elsewhere to find credit at very high rates.”
The banks might think the whole inquiry is an unnecessary populist farce but the above analysis shows how so much money and power has been concentrated in so few hands. Ironically, it is the extent of their profits which may now end up costing the banks.
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