Time for an inquiry into this bunch of bankers
Poor old bankers. They keep telling us how tough it is for them with their funding costs expected to go up and how they will need to keep interest rates inflated.
And if the crying poor line isn’t enough the banks are quick to tell us that we are “picking on them” if we have a debate about how poorly they behave especially when the RBA changes the official interest rate.
Perhaps the “we’re doing it tough” line would carry some weight if the big banks didn’t show record profits year after year and if the banks’ CEOs weren’t getting such big pay packets year after year.
Obviously, “doing it tough” is a matter of opinion and it’s easy to disregard the self-interested lines from the big banks and their CEOs.
Before the banks carry on with their self-interested comments they need to remember that society has conferred many benefits on them and society has every right to reflect on the poor behaviour of the big banks. Society, through the Federal Parliament, provides a legislative framework for banking licenses to be granted which give banks exclusive rights that basically amount to a license to print money.
As for the big banks needing to be profitable we need to acknowledge that we have four big banks that they are so profitable they are the envy of bankers overseas. For shareholders it’s clear that the big banks are an extremely low-risk investment which is rewarding them very nicely. They should spare a thought for the poor old Qantas shareholders.
Bank shareholders benefit from knowing that no Federal Government would ever allow a big bank to fail and in any event customer deposits are backed by a deposit guarantee scheme and home loans are secured by the property itself or by mortgage insurance. What other business is so well protected?
The harsh reality is that through a strong prudential framework and many strategic mergers and acquisitions the big banks have become so dominant that they can now just do what they like.
In fact, given how they dragged their heels in passing on the recent RBA cut in the official interest rate to both consumers and small business you have to wonder if the big banks just keep laughing all the way to the bank.
There can be no doubt that a failure to fully pass on the cuts in official rates is a big slap in the face to all struggling Aussie families, retailers and small businesses generally.
With the big banks again announcing record profits it’s clear that they keep on laughing at consumers’ expense. What are struggling Aussie families with home loans to make of the ever growing profits by the big banks and the self serving statements from them that since their funding costs are expected to rise they can’t “afford” to reduce interest rates on loans?
Obviously consumers and Aussie families are right to feel disappointed with banks’ ongoing poor behaviour. But it doesn’t stop there as consumers should be even more disappointed at the failure of the Federal Treasurer Wayne Swan and the ACCC to protect competition in the banking sector.
The fact is that Swan and the ACCC just stood by and let the big banks take out vigorous competitors like St George and BankWest. Sadly, this failure has allowed the big banks to increase their stranglehold over the banking sector to such dangerous levels that they can now do what they like.
Let’s be very clear. Swan could have stopped the big banks from taking over St George and BankWest. The failure to stop these takeovers and other acquisitions by the big banks deserves special attention as does the apparent rush to allow the Commonwealth Bank to take over BankWest.
These takeovers and acquisitions by the big banks have allowed them to heavily dominate the Australian banking sector. This inevitable reduction in real competition in the banking sector was made worse by the Treasurer’s and ACCC’s failure to stop the big banks from cleaning up or taking strategic interests in the non-bank mortgage providers such as RAMS, Aussie Home Loans and Wizard.
These non-bank mortgage providers were critical in driving competition and putting strong downward pressure on home loan rates. By removing or seeking to `neutralise’ these players the big banks were able to increase their dominance of the banking sector to the ongoing detriment of consumers.
Consumers and small businesses are now paying the price for the Federal Government’s and the ACCC’s failure to stop the growing concentration of the banking sector. The big banks can now continue to play games with interest rates every time the RBA changes the official interest rate.
Of course, the banks will seek to justify their games by saying that they are facing potentially higher funding costs. The only problem with that line is that despite facing higher funding costs since the global financial crisis the big banks are have been enjoying record profits year after year. What that means is that the big banks have been able to maintain or inflate interest rates on loans to more than cover any increases in their funding costs.
Ultimately, it’s fair to say that as much as the big banks think they are doing it “tough” and they tell us they need to protect their profit margins - that’s nothing compared to how tough it is for consumers and retailers out there.
There’s nothing “poor” about the big banks other than their behaviour recently. Of course, we want our banks to be profitable, but that’s never an excuse for the big banks to gouge consumers. There comes a point where profit making becomes profiteering. That line is crossed when the level of real competition in the market is so limited that the big banks can keep making record profits.
Record profits year after year provide compelling evidence that there’s a lack of real and effective competition to keep downward pressure on interest rates and fees. It’s certainly a lot easier for the big banks to make record profits year after year when the competition is weak or where competitors act as a cosy club.
Understanding how the big banks have become so dominant is a key step towards understanding why they have been able to act as they have done following the recent RBA rate cut.
First, we need a wide-ranging independent inquiry into the Australian banking sector. We need to understand why the big banks were allowed to take out vigorous competitors such as St George and BankWest.
We can certainly learn important lessons from these two critical takeovers. For example, as the takeover of St George pre-dated the global financial crisis it allows us to consider how the Federal Government and ACCC handled a large banking merger under generally ordinary market conditions.
The takeover of BankWest on the other hand allows us to assess the approach by the Federal Government and the ACCC in the challenging circumstances surrounding the global financial crisis.
By independently reviewing these different scenarios we can learn valuable lessons that we can use to help promote and safeguard competition and consumers in the future.
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