Article - Pigs Might Fly




Amid the public outrage caused by the banks profiteering off the 80 per cent of $1.4 trillion worth of home loans, there are larger, more serious long-term issues of public policy and financial stability at stake.

Australia’s big four banks are among the most profitable in the world, with returns on equity as high as 17 per cent and wholesale funding costs coming down. In failing to pass on the latest interest rate cut the banks have effectively neutered the stimulatory impact intended by the Reserve Bank and opted to increase short term profits at the expense of their customers and the stability of the Australian economy.

This is a dangerous strategy. Profiteering when operating under a government licence and a bank guarantee, fractures the trust and patience of the Australian people. World-beating returns on equity are only possible with this guarantee.  As former ANZ CEO John McFarlane said this week, “I’m ashamed of the reputation of our banks” – it’s the same view I reluctantly came to in the final three years of my Treasurership.

It’s true that strong stable banks are essential to strong stable prosperity – that’s the view I took when we guaranteed deposits and their wholesale funding during the Global Financial Crisis. As we emerged from the crisis in 2010 and 2011 the banks began to abuse their market power which had been enhanced through the crisis.

A package of reforms was put to the Parliament to enhance banking competition and strengthen smaller lenders. To prevent price collusion new price signalling legislation was passed and it may well be this very legislation that is tested in light of this week’s simultaneous decisions by the big four banks to not pass on the full interest rate cut.

Since this time there has been scandal after scandal within the big four, whether it’s the Bank Bill Swap Rate, CommInsure or financial planning.

The lesson of the Global Financial Crisis and the Great Recession was that global and national regulation has to deal with distorted incentives fuelling excessive risk taking and blatant profiteering.

Globally there is a vigorous debate about how we deal with untamed corporate, financial and monopoly power which is leading to a concentration of income and wealth with lower growth and lower living standards.

The behaviour of our big four threatens the same outcome in our domestic economy. Their contempt for this important public debate has been on show all week, even bridling at the prospect of having to appear before a parliamentary inquiry.

The biggest challenge in the Australian economy is a substantial decline in business investment. If the decade of banking super profits are not enough to spur resurgence in business investment across our economy, what will?

Surely we can look to corporate leaders to be responsible and to invest in the long term for their businesses and their country. Unfortunately, just as we saw in the evidence presented to the senate committee on tax evasion, our corporate leadership has been tested and found wanting in its tolerance and passive endorsement of rampant tax evasion.

Many boards approved billions of dollars walking out of the Australian Treasury leaving the Federal Budget high and dry.

This week, in the financial sector we’ve seen a similar failure of moral leadership by the big four banks. How on earth do they expect to be taken seriously when they are clearly driven by short-term motivation rather than the needs of the real economy? In effect they are dedicated to a financial system that serves them, not our economy.

The culture of the big four is one of short-termism and profiteering rather than long-term sustainable growth for the company and the country.

Last year, the New York Federal Reserve hosted a seminar on reforming culture and behaviour in the financial services industry. The NY Federal Reserve’s President, William Dudley, opened the seminar by saying, “reciprocity – in other words, the expectation of quid pro quo in the relationship between society and the financial services industry – is the basis of public trust in financial institutions”.

So far this week there is no sense from the financial sector that they should do anything other than business as usual and thumb their nose at their customers, the regulators and the Parliament. 

Their continued missteps and price gouging over the last decade are cultural and behavioural. To me, pigs may well fly before they will ever acknowledge that they have a responsibility to the people of this country that provides the social and economic licence they need to operate. That’s why a royal commission is needed, and urgently.