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Our banks: too big to fail, too few to be competitive

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....from the Vault!......interesting read .......... many informative points raised .......

The Drum  Mark Bouris and Christopher Joye    7 February 2012

Prior to the global financial crisis, Australia had a diverse and highly competitive financial system. The four major banks went head-to-head with the likes of St. George, BankWest, Bendigo Bank, Aussie, Adelaide Bank, RAMS, Wizard, and Challenger.

Today every single one of these entities has disappeared as a genuinely independent concern, wholly or partly acquired by the majors (with competition concerns waived by the ACCC), or merged with one another.

Prior to the crisis, Australia's banks were not explicitly government-backed. And taxpayers had never guaranteed bank deposits before (or conceived of providing such guarantees for free as they currently do), nor had they ever guaranteed the banks' institutional debts.

The taxpayer-owned central bank, the Reserve Bank of Australia (RBA), had also never lent to the banks on the much longer-dated and more flexible terms that it offered as the financial markets meltdown started to gather momentum, and continues to offer to this day.

The reason taxpayers had not got into the business of bailing-out private banks was because of a well-founded fear of "moral hazard". That's the concern that once you start insuring away a private company's risk of failure, you remove the critical disciplining influence of free markets. And executives will, over time, start behaving less responsibly, and expose taxpayers to even greater risk of loss.

Banks have nevertheless always been different to private companies because they perform a vital social function: they take our short-term savings and transform them into long-term loans. They run this constant "mismatch" between the term of the funding they receive from depositors (eg, mums and dads) and the length of the loans they give to businesses and households.

As a result, banks have always risked insolvency if their funders rapidly withdraw their money. In the 1890s, before the RBA existed, most of Australia's private banks failed. That's why we now have a public "central bank" that lends directly to the private banks. And it's the reason we have a banking regulator, APRA, to ensure that the banks hold enough "capital" to cover liquidity shocks.

We were compelled to write this op-ed because we're convinced that the policymaking surrounding Australia's banking system has been predicated on a flawed and risky paradigm: the frequently-referenced — by APRA and the RBA — trade-off between "competition" and "financial stability", which ends-up favouring a more concentrated industry.

Today Australia's prosperity relies on four colossal banks — or "oligopolists" — worth around $50 billion each. They control 80-90% of all financial transactions executed across the country. Importantly, the introduction of government guarantees for the first time during the GFC bequeathed them with a unique comparative advantage.

In contrast to their smaller rivals, the four majors are now regarded by credit rating agencies and investors alike as "too-big-to-fail". The majors get the benefit of credit ratings that have been explicitly lifted "two notches" higher than they would otherwise be because Standard & Poor's thinks they alone can depend on "extraordinary government support" in a crisis.

This helps them raise money much more cheaply than their smaller peers, which in turn means it is almost impossible to compete effectively against them. Size thus begets more size.

Some recent advertising campaigns have claimed that "the banks are at war for your home loan". Both the new head of the ACCC, Rod Sims, and we disagree. A few weeks ago Sims concluded,

Normally four players in a market should lead to a lot of competitive activity. In the banking sector it seems to need more because even though there are four of them there is a lack of full and effective competition.

While they rank amongst the 30 largest banks in the world, Australian policymakers have worked surprisingly hard to have the four majors excluded from the extra capital charges that global regulators are sensibly insisting the biggest, and most "systematically important", banks hold.

For a number of years we've suggested this is misguided and symptomatic of a worrying oligarchy between Australian banks and their policymakers. Last month the IMF agreed with us, arguing that Australia's major banks should, in fact, be forced to hold extra capital as systematically important institutions. More capital means less leverage and less taxpayer risk. So why exempt the majors, particularly when they have designs on higher-risk growth strategies overseas?

An additional capital buffer for systematically important banks would also be an intelligent disincentive to becoming too-big-to-fail. And it recognises a point we've made for some time: in many ways the catastrophic risks posed by smaller and simpler banks, like Bendigo & Adelaide, Bank of Queensland, and Members Equity, are a fraction of those threatened by the majors.

In all properly-functioning financial markets there is an inexorable trade-off between risk and return. The higher the risks you take, the higher the returns you generate. But in Australia this maxim has been turned on its head: in Australia, the supposedly lowest risks banks with the highest credit ratings — the majors — are somehow able to yield the highest shareholder returns. In contrast, the smallest banks, with the lowest credit ratings, produce much lower returns on equity. This complete reversal of the inverse relation between risk and return is the purest possible illustration that taxpayer subsidies are being used for the benefit of the banking oligarchy to the detriment of meritocratic democracy.

During the GFC, most of the smaller banks did not use the taxpayer guarantees of wholesale debts because the premium paid for the guarantee was, ironically, based on the banks' credit ratings. This made it cheapest for the major banks to use the government’s insurance, which they did in vast volumes. It was peculiar that Treasury decided to price its insurance using the same rating agencies that had missed so many of the moral hazards that triggered the crisis in the first place.

A more subtle example of how the system encourages extreme size are the terms on which the banks borrow from the RBA. When doing so, banks have to pledge an asset as collateral to get RBA funding. Included in the list of "eligible" assets the RBA will accept as collateral is any senior debt issued by an Australian bank. But historically that debt had to have a credit rating — yes, there it is again — of A- or higher, which excluded the debts issued by smaller regional banks and building societies. Since the major banks were amongst the few that qualified for the RBA's funding, this helped further support investor demand for their bonds, and thus lowered their cost. While this month the RBA cut the minimum rating to BBB+, this still excludes several smaller banks and building societies.

A final example of the unanticipated consequences flowing from recent policy decisions is the advent of so-called "covered bonds".

In the past, the first-ranking creditor to any Australian bank has been depositors. It was illegal to issue a debt security that subordinated depositors, which precluded covered bonds. When a bank raises money from an institutional investor, it normally issues an "unsecured" loan. This means that if the bank goes belly-up, the investor must queue up behind mum and dad depositors when getting paid out.

In contrast, a "covered bond" allows banks to issue loans to investors that are secured by specific bank assets. The investors thus have a claim on these assets that ranks ahead of everybody else, including mums and dads. Securing their covered bonds with billions of dollars of home loans has allowed the four AA- rated major banks to win rare AAA ratings for their funding.

The problem for the smaller banks is that they do not have the major banks' credit ratings, which, as noted earlier, are lifted higher because the majors are regarded as too-big-to-fail. And since the smaller banks have far lower credit ratings, they would have to pledge many more assets to secure a AAA-rating for their covered bonds. The bottom-line is that this makes it, in the words of one bank CFO, "non-economic" for them to do so, much like it was non-economic for them to use the government guarantees during the crisis.

In the last four months the major banks have raised about $17.5 billion of new funding via their AAA-rated covered bonds. None of their competitors has followed suit.

Setting aside the fact that allowing the majors to issue covered bonds has provided them with another fund-raising advantage over their rivals, there has been a second, perhaps more damaging, consequence: it has significantly increased their competitors' cost of funding.

CBA and Westpac's sale of around $7 billion worth of covered bonds to Australian investors has created a new ultra-safe, domestic asset-class. By doing so, it has made every other bond, including the unsecured, more lowly-rated bonds offered by smaller banks and building societies, more expensive.

The former head of capital markets at Standard and Poor's, Phil Bayley, concludes, "The bad news coming out of CBA's covered bond issue is that all other debt issues in the market will be more expensive … One of the hardest hit asset-classes will be securitised home loans, which has been a key source of funding for smaller lenders."

That, frankly, is a short-strokes summary of the policy problems we are focussed on. While resolving them will require leadership, we believe that there are tractable solutions. Here are three:

1) Change the policy paradigm: It is often said in financial markets that neither APRA nor the RBA care much about banking competition, and would prefer it if there was only one bank to regulate. Policymakers have been captive to the idea that there is an unavoidable trade-off between improving competition and reducing financial system risks. They are wrong.

As a matter of pure logic, a financial system reliant on four $50 billion banks that are regarded as implicitly government-guaranteed (much like Fannie Mae and Freddie Mac were in the US) is surely less secure, and more prone to moral hazard, than one based on, say, ten, $20 billion banks, each small enough to fail without causing widespread damage. Think of ten pillars as opposed to four.

We learnt from the US experience with Fannie and Freddie that there is a threshold beyond which size becomes a massive "contingent liability" for taxpayers. Like the major banks, Fannie and Freddie could raise money more cheaply than their competition because investors believed they were government-backed. And they were right. Both institutions are now owned by US taxpayers.

The learning from this is that we need to remove the regulatory incentives that actively encourage size of the too-big-to-fail variety. And we should consider, at the very least, explicit breaks on banks becoming too big, and then using this size advantage to horizontally consolidate other industries, such as funds management, financial planning and insurance.

One policy option is a progressive financial taxation regime, such as that being proposed in Europe, which attempts to price the too-big-to-fail subsidy: ie, the bigger you get, the higher the price you pay. Today the system is stacked in the opposite direction: as a bank’s size increases, all its costs decline.

2) Guarantee the assets, not the institutions: Australia's financial system already suffers from moral hazard writ large. Taxpayers are guaranteeing billions of dollars of bank deposits for free, and the majors have artificial fund-raising advantages through their credit ratings and new devices like covered bonds.

There is, however, one solution, which we’ve advocated in the past. All these financial subsidies come back to the fact that there is a catastrophic risk that only governments can insure. That's why the government guarantees bank deposits and bank debts. That's why the government's central bank — the RBA — explicitly refers to itself as the "lender of last resort" to private banks during crises.

Moral hazard emerges when this taxpayer insurance is not properly priced. So let's allow the taxpayer to earn a fair return and iron-out the dysfunctions at the same time. The simplest and most conceptually elegant way to do this would be to offer a permanent government-guarantee of bank-issued, asset-backed securities. This would allow any bank, irrespective of size, to issue asset-backed bonds that had the highest possible credit rating.

So long as the underlying asset quality met the required criteria, this would in turn mean that minnows like ME Bank and Bendigo & Adelaide could raise funding at the same price as CBA or Westpac. It would immediately level the competitive playing field, and remove many of the majors' regulatory advantages. And, as the current Chairman of ASIC, Greg Medcraft, leading economist Dr Nicholas Gruen, and we have argued before, there is a compelling precedent: Canada. The Canadian government offers exactly this type of insurance to its lenders. So why can't we?

3) Back the government's banking regulator, not the rating agencies: the cost of the RBA's lender of last resort facilities, and the price of government guarantees (determined by Treasury), has been based on a bank's credit rating. This confers immediate fund-raising benefits on the majors. Yet Australia's banking regulator, APRA, is responsible for setting the banks' capital requirements, and overseeing their risk management, with powers to intervene directly with a bank if it thinks something is wrong.

Since the government licences the banks, controls their risk management, and can directly remedy any issues it identifies, the government should be willing to rely on itself when determining the price of taxpayer support. We believe that the cost of government insurance should be the active and intrusive regulation of APRA, and generally priced the same, irrespective of an institution's size. If APRA is doing its job properly, ME Bank should pose no more risk to taxpayers than CBA (and vice versa).

Australia can build both a more stable and competitive financial system. All it requires is real leadership. That is the challenge politicians and policymakers now face.

Mark Bouris is Executive Chairman of the ASX-listed Yellow Brick Road, which is not a bank or building society. View his full profile here. Christopher Joye is a leading financial economist, who is a director of YBR Funds Management and Rismark International. View his full profile here.

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Comments (103)

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Banks and mining :

08 Feb 2012 2:03:31pm

Why do the banks want bigger and bigger profits? To sponsor mining. And don't let's forget the associated insurance industry. In December 2011 it was announced that the Reserve Bank of India cleared the sale of Royal Bank of Scotland's (RBS) retail and commercial banking business to Hongkong and Shangai Banking Corp, which is none other than HSBC. Before the 2008 collapse and the general financial crisis, RBS Group was very briefly the largest bank in the world and for some time was the second largest bank in the UK and Europe (fifth in stock market value), and the fifth largest in the world by market capitalisation. The RBS like many banks sponsors oil and coal and provides the financial means for companies to build coal-fired power stations and dig new coal mines at sites all over the world. HSBC is the number one shareholder of the ‘Big 4’ Australian banks.

Pedro :

08 Feb 2012 12:56:28pm

Your article makes sense to me.
As Australia is almost fully exposed to the international market place why can't a few strong banks like Hongkong & Shangai Banking Corp - HSBC and some other of the strong Asian banks be invited to participate in the Australian retail banking market in a more meaningful way?
I know people in Singapore who are discouraged by the banks there against depositing large amounts of money at all, let alone being paid interest.
Somehow it must be possible for the Autralian finance markets perhaps with government backing to tap into this Asian excess of cash.
Surely we have already done our bit for the gnomes of Europe and the USA by supporting their invasion and destruction of any government smelling of socialism or secularism!

Abe :

08 Feb 2012 12:48:05pm

Australia already has a mortgage insurance market that, after many decades, is no longer distorted by a government-backed insurer. These mortgage insurers are regulated by APRA too, so why do we need to adopt the Canadian model? Simple, because it's easier to hide a subsidy in a government-backed insurance contract.

As an aside, it's interesting that Dr Joye's shift from advocating that Australia adopt a US-style (Fannie Mae / Freddie Mac) model to advocating the Canadian model (where the mortgage insurance is separated from the securitization process, although both still live within government) seemed to coincide with those implicit guarantees coming home to roost for the US taxpayer in 2008.

Fannie and Freddy were privatized in the 1960s yet the taxpayer still found themselves on the hook. It's taken decades for the Australian government to unwind it's mortgage insurance book (hlic). Why would we go back there when there is no market failure in the mortgage insurance industry and, as Dr Joye points out in relation to banks, we can rely on APRA to ensure the private sector mortgage insurers are safe?

Answer: because everyone loves a taxpayer-funded subsidy, particularly when it's easy to bury in mispriced insurance contracts.

Eddie Murphy :

08 Feb 2012 10:37:59am

This article has attracted plenty of comment. But before we all get too excited, lets get some facts clear. Bendigo and Adelaide Bank is still independent, so is Bank of Queensland and Suncorp Bank. Between them they command more that $150billion. And then there are the mutuals that control over $80billion. Yes they are smaller and dont compete on all levels but for the general consumer they often provide cheaper loans and are just as competitive on investment rates.
The fact is that without the Government Guarantee, many of these institutions would have failed during the last GFC, not because they were not well funded or had poor structure, but because of perception. Suncorp can contest to that.
The State Governements on the other hand presided over state banks that failed in almost every state. Paul Keating was forward moving to deregulate the market and move the CBA into publilc hands and it has done very well since. The more recent growth of CBA and Westpac however was thanks to the Federal Government allowing them to buy out Bank West and St George. Bank West was not covered by the Govt. Guarantee and St George was allowed to be swallowed before the Guarantee came into effect. And so it really is the Federal Government who has let competition slide in Australia...
And from another commentator, lets be realistic here, successful banks make for a successful economy. We are blessed with low unemployment and good wages when compared to UK, Europe and the US. All 3 regions have had to bail out the banks because they didnot have the level of structure that APRA has defined in Australia. We are far better off living here than in any other country.

And to give a balanced view, the senior executives of the Australian Banks have not helped themselves by accepting such rediculously high wages. Being paid $8 million pa is not going to deliver a better result than $2 million. If the banks are to cry poor they first need to look at the relativity of the pay given to executives.

Adman :

08 Feb 2012 11:37:25am

Eddie you're funny just like the real Eddie. Firstly Suncorp would 'attest' not 'contest' and Suncorp's misery was essentially linked to their insurance arm which is the bulk of their business and not their mortgage or commercial lending which they have been less focussed on.

Totally agree that APRA is lazy and the Govt prefer to spout out the four pillars policy to make themselves appear to be morally concerned although again are lazy.

Graham :

08 Feb 2012 1:16:07pm

Spin, spin, and deceit. There are other posts here that give the correct amount of pay the CEO's of the big 4 are receiving. I advise you try harder selling the banks immorality.

Banks RBA politicians :

08 Feb 2012 1:41:58pm

Here you go Eddie, the Big 4 Banks and some of the littlies, how they shape up for ownership and profit.

HSBC Custody Nominees (Australia) Limited is listed as the number one shareholder for all of the Big Four Banks. It is a wholly owned subsidiary of HSBC Holdings Plc – trading as HSBC BANK. They own 12.09% of Bendigo & Adelaide Bank and 17.00% of Bank of Queensland. They also own 17.46% of ANZ, 13.59% of CBA, 16.86% of NAB and 14.88% of WBC. Their annual report says HSBC made a profit US$7.1 billion before tax. As of 30 June 2010 it had total assets of $2.418 trillion, of which roughly half were in Europe, a quarter in the Americas and a quarter in Asia.

JPMorgan Chase & Co (trading as the American Bank) own 7.92% of Bendigo and Adelaide Bank and 7.77% of Bank of Queensland. The American Bank thus owns: 14.51% of ANZ, 10.00% of CBA, 12.20% of NAB and 12.71% of WBC.
JPMorgan Chase had a $12 billion profit for 2009.

Citicorp Nominees Pty Limited own 2.13% of Bendigo and Adelaide Bank and 2.57% of Bank of Queensland. The own 3.84% of ANZ, 4.30% of CBA, 4.57% of NAB and 4.79% of WBC. Citigroup suffered huge losses during the global financial crisis of 2008 and was rescued in November 2008 in a massive bailout by the U.S. government. Its largest shareholders include funds from the Middle East and Singapore. In the last two financial years, their core businesses, together known as Citicorp, were profitable with $10.6 billion and $14.8 billion in net income. The company holds over 200 million customer accounts in more than 140 countries. It is a primary dealer in US Treasury securities.

National Nominees is a wholly owned subsidiary of National Australia Bank Limited.
They own 6.35% of Bendigo and Adelaide Bank and 10.87% of Bank of Queensland. They own 13.42% of ANZ, 8.81% of CBA, 11.46% of NAB and 10.47% of WBC. NAB had a net profit of $4.2 billion for 2009. …we certainly find it a little bit strange that they own less of themselves than they do of ANZ. This certainly deserves a "Please Explain!"

M :

08 Feb 2012 2:46:59pm

So who do I take my custom to?

Given that at various times I've used all of the Big 4.

Pedro :

08 Feb 2012 3:27:43pm

Very interesting but do HSBC, JP Morgan, etc provide any funding for any of our Australian banks?

You are funny :

08 Feb 2012 4:33:55pm

I am just going to guess that you don't work in finance then??!!

All of the companies you have mentioned are asset managment (or custody) arms of banking companies. They hold the asset for funds (like your super fund) in trust as a service in return for fees. They do not own or control these assets. Your very long post says nothing other than you have no idea what you are talking about

Serious money :

08 Feb 2012 2:25:18pm

27% roughly of the Bendigo Bank is owned by the big 4 share holders listed on this post, I don't call that being independent.

abe :

08 Feb 2012 3:49:34pm

Banks (including the big4) have custodian companies that hold shares and bonds on behalf of super funds and the like. That's what you're seeing there.

Banks RBA politicians :

08 Feb 2012 9:30:18am

Research reveals that 2007 Westpac asked the US Federal Reserve for USD$1 billion. And one month later NAB would need to raise billions of dollars on the Australian Securities Exchange. As NAB director of finance Mark Joiner told the Senate committee:

“There were two periods during the crisis when our credit rating was on negative watch. If we dropped out of the AA status, then the cost of funds and our access to funds internationally would have been severely altered.”

Despite that, the ABA claimed Australia’s banks were “strongly capitalised”. So “strongly capitalised” that the NAB had to raise $6 billion on the market plus another USD$4.5 billion in secret from the US Fed.

But right there, in Mr. Joiner’s statement is the precise reason why the NAB grabbed the secret loan money from the US Federal Reserve. Not because it was trying to make a few extra bucks, but because the bank was on a negative credit watch.

The bank execs knew that if the market knew just how tight the bank’s balance sheet was, the bank would have lost its AA credit rating. Here are Mr. Joiner’s comments to the Senate committee:

“There were two periods during the crisis when our credit rating was on negative watch. If we dropped out of the AA status, then the cost of funds and our access to funds internationally would have been severely altered. Then our ability to support the economy in the ways we described before—staying open for business and predictable for customers—would also have gone. We would have had to freeze our balance sheet growth and the like. While you probably do not want obscene amounts of profitability out of your banking system, it is good for everybody to have a strong banking system that supports a degree of economic self-determination and flexibility.”

See, without these bailouts Mr. Joiner admits it would have been hard for the bank to stay open for business.

Yet just like the secret loans, you didn’t hear about this statement in the mainstream press. They didn’t seem to think it was important enough.

MoneyMorning 17th December 2010.

Pedro :

08 Feb 2012 12:58:30pm

It all goes back to the $700 billion of private debt racked up under the Howard & Costello regime.
Chickens coming home to roost.

Banks RBA politicians :

08 Feb 2012 9:24:09am

I'm sure you're aware of this statement by Professor Cornish who gave evidence at the Senate Economics References Committee in December 2010:

'The Campbell report argued against publicly owned institutions and for the deregulation of the financial system but, at the same time—and this is something that people often forget—it recommended that there should be a stronger prudential regulatory system. At the same time that it was recommending the deregulation of bank interest rates, floating the dollar and so on, it was pushing very hard for stronger prudential regulation. This really got the Reserve Bank going. It did a lot more work after Campbell. It set up a supervision unit. The Banking Act was altered in the 1980s to provide a stronger prudential system in Australia. So the thing is that you can control the system through means other than government owned

Wading through this is very interseting:

Isiaiah :

08 Feb 2012 6:53:43am

Wrong , Nationalize the Banks and take all the money to England Twenty million need settle there. Three million armed men and women will protect australia with nuclear stand off and cold war with indonesia when it obtains nuclear weapons with the help of double agent Barak Obama.

kali :

08 Feb 2012 2:43:37pm

Thanks Isiaih. Love a good conspiracy theory.

Hudson Godfrey :

08 Feb 2012 6:41:16am

All this is very well and thoughtful, but what if the premise is just basically wrong. What if it is more important for banking to function as a foundation for the markets in a way that is itself outside of their influence? Maybe the cost of making those changes is to forgo shareholder profits but then maybe at least these institutions would act as a brake on market excess rather than as a key player in capitulating financial instability.

In other words you may not have to regulate against the excesses of a banking system that is not itself wholly and solely motivated by greed. The solution may be simple as bringing back the State banks in order to let them set the benchmark for competition.

Stacky :

08 Feb 2012 1:10:23am

Investment banks such as Macquarie also profited from the Banking Deposit Guarrantee Scheme. Against the spirit of the legislation they secured loans for South American countries as reported in the SMH. Today they are whining what a difficult investment climate they are operating in. At the same time David Murray (ex CBA (collected $30M payout); Future Fund chief and now appointed to a position with Credit Suisse in the last week) is berating Swan for having a go at the banks in the event that there would be a RBA rate cut, which of course didn't materlise this arvo. At least Bouris sold Wizard as a going concern to secure his pay day.

Check out the culture @ The Intercontinental bar, Customs Place etc. & have a beer and you'll soon become aware of bankers boasting about their bonuses & retention allowances. The culture of entitlement is breathtaking. After all Don Argus ran NAB when the dealing desk broke the old ASIC laws. He famously said to Terry McCrann in the mid 80's, "If you pay peanuts you get monkeys". A cliche' and not original at that.

The authors point regarding the undue reliance on the rating agencies is spot on. People forget it was a disaffected S&P director that blow the whistle 9 months before the GFC.

Banks RBA politicians :

08 Feb 2012 9:05:56am

In 2010 pay-packets were:

Commonwealth Bank: CBA boss, Mr Ralph Norris earns: $16.2 million.

ANZ boss, Mr Mike Smith is paid: $10.9 million - ($5.3 million in shares - imagine that dividend cheque!

Westpac Banking Corporation: WBC boss, Ms Gail Kelly is paid: $9.6 million - ($4 million in shares)

National Australia Bank: NAB boss, Mr Cameron Clyne gets: $7.7 million ($3.1 million in shares

Meanwhile Westpac and Macquarie are following ANZ and sacking hundreds of bank employees.

R.Ambrose Raven :

08 Feb 2012 12:55:04am

As one of the Big 4 credit providers in our economy, the Commonwealth Bank should have been kept as a publicly-owned bank. (It was flogged-off in a three-stage process by the Keating Labor government between 1991 and 1996). Since a sustainable level of bank profits appears to be about 1% of GDP, but the finance share of income is now over 5%, it fits well with our perception of rapacious private banking that the Big 4 banks appear to be profiteering to the tune of $20 billion a year.

To quote “How Money Is Created in Australia,”: “Australia’s own government-established Commonwealth Bank achieved some impressive successes while it was ‘the peoples’ bank’, before [being sabotaged] and eventually sold. At a time when private banks were demanding 6% interest for loans, the Commonwealth Bank financed Australia’s First World War effort from 1914 to 1919 with a loan of £350,000,000 at an interest rate of a fraction of 1%, thus saving Australians some £3million in bank charges.”

Similarly, all the largest Chinese banks have set up a serious presence in Australia, if only to facilitate the large investments that China is now making in the resources sector. Being state-owned, they will have national strategic as well as profitability objectives.

Again we see the determination of the decisionmakers to serve private greed rather than public need.

Re-creation of a government bank (a full-service trading and savings statutory authority banking conglomerate, with accountability only for strategic issues) could do a lot of good things:
* Wider and more flexible opening hours;
* Branches in every country town of significance;
* Focus on the productive use of money lent – debtor finance, ventures that have reasonable prospects of indefinitely continuing, etc;
* Explicit rejection of “growth” in favour of “sustainability” as the measure of success;
* Low-interest housing loans, from funds supplied by Treasury where extra is needed;
* Explicit focus on social consequences of lending
* Venture capital financier; e.g.
o environmentally-adapted mixed and monoculture farming.
o early to mid-cycle technology/manufacturing firms.
* Safety due to government guarantee of debts;
* dealing with extraordinary events, such as financial crises, wars, conflict, and the sudden loss of international services;
* Fees to be closely related to reasonable assessment of cost;
* Infrastructure lender;
* Government bond funder;
* government-managed superannuation fund;
* a source of practical, detailed and honest advice about how the banking system really works.
* compensate for the ineffectiveness of regulation of the profit-seeking bank cartel;
* take over the assets and non-speculator liabilities (for $1) of collapsing profit-seeking banks.

Pedro :

08 Feb 2012 1:08:29pm

Mr Raven, when even US presidents are too frightened to take on the private bankers, with a couple of presidents even being assassinated by them here is NO chance of their ever being another Commonwealth bank in Australia.
Perhaps we should question Hawke and Keating whilst they are still alive as to what pressures, from what nations, and what groups, were put on them to betray Australia by selling the Commonwealth bank.

skidMarks :

07 Feb 2012 11:52:44pm

On topic:

"Some of Japan’s biggest banks are reportedly poised to enter the Australian home loan market, said to be worth more than A$1 trillion (about $1.06 trillion)."


Pegaso :

07 Feb 2012 11:40:08pm

I think a lot of responders need to get out of this country,look around and see if they can find a place where they would be better off.Ive recently had 7 weeks in North America,mainly in Canada,a nation similar in many respects to Australia,with similar issues,but with a conservative Government.Didnt meet anyone who said Id be better off living there, but did meet people who envied our standard of living, wages,environment,health system,social welfare system.

sean :

08 Feb 2012 8:55:24am

Maybe it's the Canadians who need to get out of country for a while - how do they really know it's really better here?

You seem to be using a "grass is greener" argument, supported by circular reasoning to say that people in Australia are wrong to be examining ways to make our society better.

In my view, Australia could be the best run country in the word, with the highest standard of living and we would still be fools not to be constantly looking at how we might do things better.

Banks RBA politicians :

08 Feb 2012 9:14:21am

Obviously you mixed with a different crowd in America. Not those who have lost so much when the strong profitable banks collapsed.

Rod :

08 Feb 2012 9:16:39am

The Finnish would call your comments a bridge for donkeys. Something which seems to be, but is, in fact, completely unrelated to the topic at hand.

You can't stop the world from turning. What may have been beneficial in the past may become a liability in the future. These men are pointing out the liabilites.

Toby :

08 Feb 2012 3:01:22pm

Pegaso, what does your trip have to do with competition in the banking sector?

R.Ambrose Raven :

07 Feb 2012 11:27:28pm

Indeed, it is now increasingly clear that the pre-1983 mixed economy was a lot more appropriate to our circumstances than the good times since bought on the never-never at 20% interest. When the dust has settled, as the cost of credit will be much higher, we will have very limited prospects for wealth and little “economic growth”. Note that Japan has been suffering exactly this situation for two decades, though for different reasons.

Public provision of a wide range of social and economic services will therefore mean the difference between modest comfort and poverty for an awful lot of people - but given the contempt of the big business class and the politicians they own for ordinary people and the public good, we will have to confront them to get it.

Imperialists and warmongers will rejoice that Great Britain created the Bank of England in 1694 as the financial resource for further colonial and commercial expansion and to finance war. Socialist and public schemes are very acceptable to the 1% - as long as they and not the people benefit.

So the choices are to act to save ourselves notwithstanding the fury of the international financiers and the neo-colonialists, or obey their diktat and suffer.

Were the Commonwealth Bank still in public ownership, it could have a branch structure with a presence, however small, in every town; it could have issued mortgages at whatever below-market rate our dear Treasurer was willing to subsidise; it could have continued as a venture capital/industry development bank; the Federal Government would have earned very significant dividend income; it could have undermined the price-gouging of other banks; the Treasurer would have had a source of practical, detailed and honest advice about how the banking system really works (which he obviously needs). Not least, being publicly-owned, its depositors, its debtors and all other banks would know that it was completely safe.

Another key role of the banking system is the provision of payment systems, any problem of which can very quickly impact the wider economy, especially vulnerable businesses and households. In December '10, the CBA had a half-day data problem that caused up to half a million people to be unable to access their accounts. Banks’ privatised version gives them access to 'free' balances, charge fees, and, because the activity is critical to the economy, a not so implicit government guarantee .

In 1990, 50% of people polled opposed the Commonwealth Bank having been flogged off. After another five year's experience, 64% opposed it. And now, certainly more still!

Pedro :

08 Feb 2012 3:38:45pm

Unfortunately as anyone who has ever played Monopoly knows the capitalists cannot and will not stop until they own everything - a mixed economy is ever destined to be taken over by the capitalists completely.
Look at Iraq, Libya,and Syria, all mixed economies - two destroyed one to go.

EddyC :

07 Feb 2012 11:26:06pm

It is our money these bankers use to generate the massive profits. They don't create anything themselves. We are forced to use these institutions for security reasons, so their business is given to them on a daily basis.

This article doesn't cover the issue of fractional banking, where banks use the value created by others to generate debt which they then profit from.

The other issue not mentioned here is that shareholders in banks and the banks customers are in direct competition with each other. Shareholders want depositors to be paid as little interest as possible and want lenders charged as much interest as possible. This is a major confilict of interest and the bankers sit in the middle and make huge profits with other peoples money.

sean :

08 Feb 2012 9:20:14am

I agree that there is a fundamental issue with the way we do banking, and that is that essential services should not be left entirely up to private enterprise & the free market. As you say, we don't have a choice about using banks - there is no way to be a part of this society and not use them, so that leaves us in a position where we cannot exercise a market choice to not use their services if we don't like what they offer. The situation created by banking oligarchy and reduced competition as discussed in this article just makes our only remaining choice of choosing a different bank not much of a choice at all.

I don't know what to do about it, other than not voting for parties who are dedicated to maintaining the status quo.

Bemused :

08 Feb 2012 12:59:23pm

I love how people keep complaining banks get all this money but don't "create" anything, yet no-one suggest where businesses and companies should get loans from instead. Startups cost money. Expansion costs money. Not to mention it can take a while for things to become profitable. So without finance offered by the banks, we'd have less of everything created. Apparently that's not important though.

Sally :

08 Feb 2012 2:11:18pm

The finance is not the banks. Banks are an intermediary and their practices have become disgraceful. Compare bankers to teachers and nurses and try and understand why bankers can generate huge profits and teachers / nurses can't.
It is because banks have access to all of our money. That's why, as posts here suggest, the CBA should never have been sold.

TommyD :

08 Feb 2012 2:58:28pm

Bemused: The money is not the banks, we don't get it from them, they get it from us. Do you understand? They then lend it out and take a piece of everyones money in the process.

Jimbo :

07 Feb 2012 10:39:00pm

An excellent, cogently argued piece.

I must say, Christopher Joye and Mark Bouris get a pretty hard time over at, unjustified in my view having read this article.

Lyonwiss :

07 Feb 2012 10:14:38pm

The authors either don't know the facts or are being deliberately misleading with this statement:

Today Australia's prosperity relies on four colossal banks — or "oligopolists" — worth around $50 billion each. They control 80-90% of all financial transactions executed across the country. Importantly, the introduction of government guarantees for the first time during the GFC bequeathed them with a unique comparative advantage.

Government guarantees are not a "unique comparative advantage" to the "four colossal banks", because they apply to all APRA regulated deposit taking institutions:

Luke :

07 Feb 2012 9:23:06pm

Good article.

A bank would not be allowed to fail in Australia, because so much of the savings of people are tied up in them.

One way to remove some of the moral hazard would be to reduce the "public" or "social" responsibilities of the commercial banks.

This could be done by allowing the RBA to accept deposits from individuals. So anyone who wanted a truly risk-free bank account would have access to one. These funds should not be used for commercial lending, just invested in government bonds.

Anyone who was seeking a higher rate of interest could deposit or invest in commercial banks, but would bear the full risk of doing so.

Andrew Elder :

07 Feb 2012 9:13:14pm

In one breath you say that the regulators are too close to those they regulate. In another you call for independent advisors (ratings agencies) to be replaced by the regulators.

Of course, ratings agencies have made serious errors - but are regulators to be trusted to do a better job? Can you suggest ways of improving probity without making the regulators' job impossible?

Pieter :

07 Feb 2012 8:47:55pm

I like this op-ed piece and the policy changes advocated. The political party that picks this up and runs with it would (in my opinion) get a positive response from the polls because it has three easy selling points:

1. Increase competition in the banking sector to make banks work harder for their money.
2. Extracting a return for all Australians for the benefit of guaranteeing deposits - user pays and value based, so small banks have a chance.
3. Reducing the reliance on foreign rating agencies complicit in the pre-GFC shenanigans in favour of Australian agency (one can play the xenophobic card here).

Political parties move slowly, so in the interim I will probably increase my stake in Westpac.

Bud Peart :

07 Feb 2012 8:42:22pm

Banks, Mining, Energy Production, Supermarkets and the Media need to be forcibly broken up and diversified in this country. They are ruining our democracy and denuding the nation of proper revenue streams.

The effectively run both the policy agendas for the ALP and LNP and do not offer value to Australian consumers.

We need a political party that will pursue this.

jim :

07 Feb 2012 11:42:56pm

The matters extend to imbalances in town planning, environment, abuse of top rate farm land for twisted real estate politics and human welfare to name only a couple of the many complexities.Basically making deserts and holes in life and stability repeatedly for the people to dig their way out supporting the movements, mostly lower classes to foot the bill and designated as perpetual whingers to be ignored and complaint dissapated to support the "level playing field".

sean :

08 Feb 2012 10:30:01am

Yeah but those same working class people who would most benefit from a fundamental change in the way we do things - towards a focus on people over corporations - are the ones who keep voting against any such changes. What do you do?

Greg :

07 Feb 2012 11:58:43pm

Bob Katter

Pedro :

08 Feb 2012 1:14:10pm

Yeah but I'm worried about the bullets flying everywhere in suburbia as Bob and his mates kill every living being in sight if it is not a horse, sheep, or cow.
Apart from those minor foibles " you know he makes sense "

bailed out :

07 Feb 2012 8:40:33pm

Did you know that the NAB and Westpac almost collapsed during the GFC and had to be bailed out by the US Treasury? No? Well, it’s true. Both banks were bailed out by the US — receiving several billion dollars each because they were facing massive liquidity and solvency problems. This was cofirmed by a Senate Committee investigation in 2010. Of course, it wasn’t reported in the Murdoch/Packer/Fairfax, Rhinehart/Gordon,Stokes mainstream press — which, if not corrupt, is highly incompetent and easily deceived. Yet where is the Australian mainstream press on this story? Good question. Nowhere. The mainstream press conspired with the banks and regulators to sweep the secret loans scandal under the carpet. And now they’ve done the same with the Senate committee statements.

The Blue Smurf :

07 Feb 2012 9:01:45pm

So where was it reported, Australian media doesn't own the internet. Where are the online references?

Bill :

07 Feb 2012 10:21:44pm

What you say is absolutely true and a mere part of the ongoing scandal of Australia's banking system.

R.Ambrose Raven :

07 Feb 2012 10:54:33pm

Could you provide the evidence?

Where in the relevant Hansard transcript referred to at
are the relevant references to be found? Readers should not be expected to pore over a complete volume of Hansard. Just carelessly dropping one could break someone's leg.

Uncle Bob :

07 Feb 2012 8:13:33pm

Way back in the good old days, before one of our "world's greatest treasurers" sold off the CBA and deregulated the banking industry, in addition to the big four, there were seven "free enterprise banks" ( remember them ? )
It was a level playing field, and competition was generated by multi-tiered service levels ( remember service ? )
Now we have less banks, no service, the bankers pay themselves big salaries and bonuses and the institutional shareholder is king.
That's progress folks.

mick :

08 Feb 2012 1:05:04am

Remember when we all got paid in cash and banks bent over backwards to get us to put our money in to their banks.

Now everyone’s pay goes directly into the bank, including all welfare payments, and we have to go cap-in-hand to the bank, paying for the privilege of getting access to our own money.

That is where and when the service went.

Bring back cash payments I say.

sean :

08 Feb 2012 10:34:09am

I remember the banks saying that direct depositing our pay would lead directly to lower fees, if not the abolition of fees entirely.

Then they said ATMs would lead to reduced fees, as a result of huge reductions in overhead associated with personal banking.

The fees are still around in both cases.

Belly up :

07 Feb 2012 8:11:23pm

Highly competitive? If they went belly up they surely were paper tigers not real entities. So I disagree if someone thinks that real competition has gone down. What have gone away is unreal competition that existed.

Louise :

07 Feb 2012 7:45:41pm

fortunately I don't have a lot of spare cash so I stash what little I do have at least it doesn't cost me to do that. I don't own my own home either so there's no mortgage to worry about, no interest rate to worry about. Rent costs me about $20,000 per annum. I have very little credit card debt and yet I get very angry about banks ! They seem to have a mind all of their own as if there is no one steering them ! Profit profit greed greed ... the end ! The CEOs are ok tho' ... aren't they need for them to be concerned .....

Pegaso :

07 Feb 2012 11:30:30pm

Are you sure you arent paying a mortgage Louise?I wonder how much of that $20,000 of rent you pay is helping pay your Landlord's mortgage or loan.I bet he/she wont end up on the pension.We are lucky to have strong, profitable banks,able to lend money to investors and developers who can then provide people ,like you, with a home to rent.

Banks RBA politicians :

08 Feb 2012 9:13:11am

We are lucky to have strong profitable banks? Vested interest there, stinks to high heaven.

spinning again :

08 Feb 2012 9:32:10am

A strongly capitalised banking system doesn’t need a raft of government and central bank bailouts. It certainly doesn’t need secret loans from a foreign central bank.

Pedro :

08 Feb 2012 1:23:28pm

Hop on a jet to Singapore.
There are relatively high payments from both participants and employers into their national super fund but.
Rent a government financed but privately built apartment for a very reasonable sum. You even have the option to buy your apartment with a very low interest loan from the super fund.
Not only that an average worker you will be able to retire at age 55 with up to $2 million cash.
The reason for this absolute efficiency and choice is that there are no private enterprise parasites grasping at every cent you earn, from cradle to grave, as in Australia.

anon :

08 Feb 2012 10:47:59am

if you are paying rent then the chances are you are paying someone elses investment mortgage....which means that interest rates do impact the payments go up..then so is the push to drive up rent...

Softdog :

07 Feb 2012 7:21:08pm

Classic case of socialise the losses and privatise the gains...The Free market/capitalism is doomed

wilc :

07 Feb 2012 6:54:06pm

Agree wholeheartedly.. things have to change and while we are at it lets do something about the ACCC, its incompetent, it doesn't protect our farming land , our minerals and how it ever approved the Westpac takeover of St George I will never know. Our competition policy and our competition watchdog are to put it mildly USELESS!

kbdb :

07 Feb 2012 6:38:10pm

I love it when free-market advocates call for more regulation when things don't go their own way. Empty vessels......

Geoff :

07 Feb 2012 6:25:17pm

Well this explains why when I looked for somewhere to put my cash the obviously safer big banks were offering better rates of return than the riskier small lenders! Three guesses where my cash is...

But seriously, who in thier right mind would put a lot of cash in small lenders who are dependant on the stability of house prices, with no gurantee of getting it back in the even of a property crash? The risk is small but plainly evident in the current climate.

Davest :

07 Feb 2012 6:24:21pm

Can you please ram these ideas into the hearts and minds of our politicians and make them listen! Especially tell the treasury.
It's an Excellent article. We need wise independent heads instead of goons captive to this or that narrow interest.

Jack Jeckyl :

07 Feb 2012 5:57:00pm

You can always stop using banks if you don't like them :)

Johnnie Valhalla :

07 Feb 2012 7:18:05pm

I belong to the Fitzroy and Carlton Community Credit Co-op. It's been going for about 30 years. They don't do home loans but they do small loans for low fees, and they have business plans.

They invest in ethical investment, they look after their members.

They are antithesis of everything the parasitic modern finance sector lacks: decency, integrity and moderation.

Another Aussie :

08 Feb 2012 11:10:36am

Yep, I stopped using banks several years ago. Circling vultures don't appeal to me. Yet, it needs to be recognised that one does deserve the right to chose which leech can suck them dry. My credit union fees are nowhere near as bad as any of the big banks and my credit union has no overseas call centres. They win, customers win, employees win, in fact everyone's a winner with the credit union.

Although banks have enjoyed my business for decades they no longer have my mortgage, superannuation, credit cards, savings accounts or loans. Oh, and the credit union always have shorter queues if ever I go into a branch.

Gravitas Dignitas :

07 Feb 2012 5:56:43pm

Well fancy a Executive Chairman of a financial services NL company and an economist writing about wise ways to change banking here in OZ.No one will listen boys.The banks and government,this includes the opposition,are too busy waltzing around doing the Pride of Erin,to care what is right.We need de -monopolization not only in banking,but media,retailers and pharmaceuticals as well.Have a good one.

Johnno :

07 Feb 2012 5:51:33pm

Many thanks for an excellent informative article.

I am a bit bewildered by the "spin" that taxpayers deserve a return for the g'tee the Govt. made available during the dark days of the GFC and still do, to a lesser degree, today.

In my view, the GFC was the catalyst to crystalize the safety of our banking system. Till that point I had "assumed" that bank deposits were g'teed by the Govt./taxpayer.(lender in the last resort).

K.Rudd's announcement (with Opposition in principle support)that deposits, to a maximum of $1m, in approved banks, were g'teed, was his finest hour.
It was a wonderful community morale booster.
The Nation was pulling together in defence of each other.
The current situation in the USA and Europe show that taxpayers still need to know our banking system is g'teed, safe.

Why do taxpayers deserve a return on the g'tee when they/we need/demand safe haven ?

DavidXevon :

08 Feb 2012 9:36:26am

Agreed on the GFC and the immediate guarantees that were offered, but it is time we had a clear policy statement from both major parties on this - I will not vote for any party that continues to underwrite our big 4 banks with taxpayer funds. The concept of shareholding is that the shareholders (investors) accept the risk - and as most taxpayers are not shareholders of the big 4 then the government should not be absorbing the shareholders' risks.......

Bighead1883 :

07 Feb 2012 5:44:18pm

Yeah men.a right royal con job.The monopoly of the big 4.If it was not not for Rudd with his Social Democratic leanings during the first days of the Wall Street created GFC things would have been much worse.What is even far worse is that the American government does not even own it`s Federal Reserve anymore.The big 4 here are playthings of the Wall Street manipulators with the majority of shares owned by the institutionalised corporations.Those same corporations are funded by the banks.Cosy hey!So now bankers want to run countries,and in Italy and Greece they do.That`s like letting a kleptomaniac clean your grocery store after hours.Or worse allowing an economist to be treasurer of government.Thomas Jefferson wrote in 1802 a prophecy which is proved to be correct.It applies worldwide.he wrote"I believe that banking institutions are more dangerous than standing armies.If the American people allow private banks to control the issue of currency first by inflation then by deflation,the banks and the corporations that grow up around the banks will deprive the American people of all property until their children wake up homeless on the continent their fathers conquered.So these same banks and corporations create these financial crisis far more regularly now.Yeah start it up good for awhile,sell plenty of houses that were repossessed by the banks after creating a job spike,then pull the rug again in 8-10 years.Money for jam with the blessing of so called democratic governments that are run by the banking institutions.

Queenslander :

07 Feb 2012 5:41:56pm

We must be very careful that we don't allow our banks to be controlled by foreign interests, and have them control our financial system, or have a worsening of our balance of payments due to more money going offshore.


07 Feb 2012 7:13:44pm

What are you talking about Queenslander?

It is too late; far too late and it is not just the banks that are already foreign controlled.
The Australian Gov’s financial systems & strategies are now driven by International controls.

Don’t believe me!

Check the facts of the establishment & implementation of the Australian Gov’s stimulus package in response to the GFC meltdown.
We were under the Rudd Gov at the time - but that is immaterial – and it was announced by Swan that we would have a TEN BILLION DOLLAR stimulus package.

A cheerful Ken Courtis, who is internationally financially faster than a speeding space shuttle; more internationally financially powerful than the Bullet train, and internationally financially able to leap the Burg Khalifa building in Dubai from a standing start, suddenly appeared all over the media stating that Australia’s stimulus package would need to be at least FOURTY BILLION DOLLARS.

Ken rose to the pinnacle of international banking/finance by the usual way of being blessed with a remarkable talent for sophistry.
Ken is so skilled at sophistry that even though I absolutely know he is always spinning a line guaranteed to benefit the banking/financial industry & totally screw you & me, I cannot help being convinced by his spurious arguments.

Having digested this understanding properly, and taking into account that Ken wields more international financial clout, figuratively speaking, than a George Foreman uppercut; I remarked to various people that the Oz stimulus package would definitely be of the magnitude of FOURTY BILLION ODD DOLLARS.

Universally, I received the response that such a figure for Oz was ridiculously out of proportion to what was in our best interest.

I think you will find it ended up being FOURTY TWO ODD BILLION DOLLARS.

Not that Ken could have had any influence at all: Of course!

Who owns the banks :

07 Feb 2012 8:09:13pm

‘Today Australia's prosperity relies on four colossal banks — or "oligopolists" — worth around $50 billion each.’ Ah yes, but who actually owns these banks?

HSBC Custody Nominees (Australia) Limited is listed as the number one shareholder for all of the Big Four Banks. It is a wholly owned subsidiary of HSBC Holdings Plc - You Know... HSBC BANK - Yes, that's right... HSBC Bank owns more than 10% of all of the big Four.

JP Morgan Nominees Australia Limited is listed as the number two shareholder for all of the Big Four Banks. It is a wholly owned subsidiary of JPMorgan Chase & Co. You know - That Great Big American Bank. In fact, they're also the number two shareholder in a few other Australian banks. They also own 7.92% of Bendigo and Adelaide Bank and 7.77% of Bank of Queensland.

National Nominees Limited is the number three shareholder for all of the Big Four Banks. It is a wholly owned subsidiary of National Australia Bank Limited - You know the BANK that just staged a HUGE break-up. It must be an awkward break-up indeed with all of those shared assets.

Citicorp Nominees Pty Limited is listed as the number four shareholder for all of the Big Four Banks. It is a wholly owned subsidiary of Citi Group Inc. You might know them better as Citi BANK. Citi Group Inc only has the largest financial network in the world. In fact, they're a major shareholder in a few other Australian banks. They also own 2.13% of Bendigo and Adelaide Bank and 2.57% of Bank of Queensland. Citigroup suffered huge losses during the global financial crisis of 2008 and was rescued in November 2008 in a massive bailout by the U.S. government.

If you want to know more about the big 4 banks have a look here:

Kobe Simon :

07 Feb 2012 10:00:50pm

That's quite scary. Don't know much about HSBC, will have to look into them but JP Morgan were started and financed by Rothschilds Bank the same bunch who own a large share of the US Federal Reserve. Apart from that some of the scandalous things JP have done in their blatant manipulation of the silver market and their bankrupting of small US municipalities qualifies them to join Goldman Sachs as part of the evil empire. In fact I think ahead of any oil corporation, JPM, GS and Monsanto (yes I know not a bank) would vie for top dog as the most evil corporation in the world. That is of course forgetting the quiet achiever in the background of so many of these corporations and banks, the Rothschilds.

Pedro :

08 Feb 2012 1:28:44pm

Mate Im' a Queenslander as well but please try not to embarrass us other Queenslanders with such ignorant uninformed rot.
Most funding for your mortgage or credit card comes from overseas and not the other way around.

John of WA :

07 Feb 2012 5:41:36pm

One of these Big Four banks wrote to me recently to explain whey they couldn't possibly reduce my interest rate in line with the RBA due to the 'high cost' of money in the current financial climate. A simple online search revealed that same bank had made a profit of over 2 Billion dollars up to Nov last year. Times are tough eh?

John51 :

07 Feb 2012 5:34:37pm

Thanks for this article. It is interesting that the banks themselves and their industry spokesperson are arguing that they are too big to fail. They are arguing that they need to be protected and that protection includes the protection of their right to continue to make very large profits each year.

The banks and the banking organisation are arguing that they are so essential to the economy that their very large ever increasing profits need to be protected. Now wouldn't a lot of other industries like to also have that right to continue to make ever larger profits even in an economic downturn? If they are so big that they need to be protected to this extent, as far as I am concerned they are providing all the reasons as to why they should never have been privatised in the first place.

The supporters of privatisation argue that privatisation is all about competition. But if the whole system needs to protect banks to this extent, there is no real competition. Yet that is the quandary that this privatisation of the banking system has led this country has down.

SmithW :

07 Feb 2012 5:23:16pm

When the government tells us that there is no money for schools, hospitals and welfare programs, remember that public money, taxpayer money, is going directly to the major banks and other private corporations such as GM and Ford. Add to that the money that Julia Gillard has promised to the IMF to "help Europe" and get angry. But don't think that voting for the Liberals will change any of that because the only real difference between the two major parties is the spin.

Sydneysider :

07 Feb 2012 5:43:46pm

How true. Both sides are letting Australians down. The majority are too scared to change their vote away from the two parties, thus ensuring the current rot continues.

WP :

07 Feb 2012 6:05:51pm

What money is going to the Banks?

They pay billions in tax every year, and they paid more than a billion for the guarantee.

So what money are they getting?

Yes we are propping up the car makers, but at the end of the day, the government is getting more in tax revenues than they are spending, so in reality the government is protecting its tax revenue stream.

SmithW :

08 Feb 2012 9:35:35am

Although it was not widely reported, two of the four pillars needed immediate cash injections from the Australian government at the time of the GFC to keep trading and keep their doors open.

Beyond that, the government guarantee has to be underwritten with actual money and that is money that cannot be spent on anything else.

When it comes to subsidising large multi-national corporations, if they are based offshore then the corporations pay no tax on their profits in Australia. Sure, the local workers and local subsidiary and supply companies pay some tax but the corporations that get the government funding do not.

Another example of government subsidising large corporations can be seen in Queensland where state and federal funding is going towards massive repair and upgrades of the Bowen Basin rail and port system. This rail system exists only to transport coal to port and these ports are only there to ship coal overseas. So many millions, if not billions of dollars of public money is being spent so a private corporation can move it's product to market.

When governments turn their back on their social responsibilities in favour of propping up or promoting private corporations, that is, I believe, the very definition of facism.

Graham :

08 Feb 2012 1:02:18pm

Spot on. Subsidies to huge mining corporations run in the millions and millions, meanwhile the profits taken overseas by these mining companies are billions. And the taxpayer funds their diesel, infrastructure and R&D.

Graham :

08 Feb 2012 1:03:58pm

By the way, a little research into companies reveals that the banks and mining companies have same shareholders.

Welsh Mike :

07 Feb 2012 5:19:40pm

But the bank's are a clever mob. They won't use the sensible (base rate + fontractual fixed margin) calculation to set a borrower's mortgage rate. No, they have total flexibility to adjust the margin according to their needs (read profitability).

Similarly, Gail's use of the panic during the GFC to allow Westpac to swallow up St. George, who was not under threat, was a masterpiece of strategy. She knew the labour party was short of knowledge in banking/finance and pounced. A totally unnecessary takeover unless you're a Westpac shareholder.

We all crow about how successful and profitable the banks are but that should only be if those crowing are shareholders. As customers we should be crying.

g :

07 Feb 2012 4:39:59pm

Deposits are guaranteed, so there is no problem of issuing "covered" bonds based on net company worth, as any banking bad debts were written off voluntarily prior to any agreement taking place between the Government and institutional (bank) lenders.

Stranded :

07 Feb 2012 4:38:17pm

Wayne Swann singley failed in a historic opportunity during the GFC to make banking in Australia a better deal for citizens.

He (and Rudd) panicked ... and gave away ALL the aces.

Any talk of Labor being a safe pair of economic hands is a JOKE. They are bumbling fools who continually think they are smart than commercial business.

It hard to be hard on the bank when fools set the rules.

Now I see Swann's only recourse is to make idle THREATS to the banks by telling consumers to take thier banking elsewhere if a certain Bank chooses to shed staff. I dont see Swann making the same threats against Holden !!!!

The banking industry is the country is MASSIVELY regulated. Weak and stupid government deliever the banks that we get.

Another Labor fail ....

Gina O'Donoghue :

08 Feb 2012 10:59:48am

For someone so forthright and knowledgeable pity you can't spell "singley", sort of shoots your argument in the foot that is firmly planted in your mouth.

geoff :

07 Feb 2012 4:36:24pm

bring it on!!!

level the playing field

kelvin11 :

07 Feb 2012 4:33:22pm

I think you would also find violent agreement from Paul Keating. He expressed regret that the bank sector has been allowed to concentrate and that competition is the consumer's best friend, even in banking.

(Incidentally, I constantly wonder why no journalist has tackled the former PM on his reformist legacy and whether the two most recent Labor Goverments have treasured or trashed it. And in the interests of balance, whether or not in his view Howard/Costello advanced the reform cause).

Ergo, what is needed is the issue of more banking licences, or will the incumbents argue that "now is a bad time"?

The ACCC's problem is that its test "no substantial lessening of competition" regarding M&A activity is such a weak one - it invites the interpretation: competition is already stuffed - things can't get much worse - a view not limited to banking.

ColdWarWarriors :

07 Feb 2012 4:25:38pm

If they are to big to fail then they should fail, no taxpayer bailouts. Thats the problem here once these big banks know that they have always got the government to bail them out they then take on more and more leveragae and insane levels of risk, when it works they keep the profits, when it dosen't the taxpayer will pick up the bill.

DG :

07 Feb 2012 4:44:23pm

The strange thing is that the Gov is about to make the same mistake with super funds through mergers. Tresury are slow learners.

Steven :

07 Feb 2012 4:21:52pm

Execllent article. The approval of mergers since 2007 has been a stunning policy raspberry to the concept of competition and Australia will regret the decisions down the track. A big obstacle to reinvigorating competition is that teh big four have the power of incumbency when it come to collecting cheap deposits from average depositors. In addition to the steps outlined in the article, how about the government require its agencies and authorities depsoit their funds with some of the smaller players to give them a source of cheap deposits.

Doug Quixote :

07 Feb 2012 4:15:06pm

The Banks are all very chummy, an informal cartel which sees all four of them in virtual lockstep.

If only Chifley had managed to nationalise them in 1949.

W.A. Beau-Gann :

07 Feb 2012 5:26:27pm

So what you are proposing is to remove the current banking oligopoly and replace it with a state owned bureaucratic monopoly?

Not certain that is an ideal solution. I can just hear every economist listing what is wrong with such an idea. The only disagreement they would have is how much they disagree with the idea and just exactly how bad an idea it is.

An additional point of interest is that one of the Authors is a competitor to the big banks and therefore has a vested interest. Just like every other opinion piece posted on the Drum. Read with care and scepticism.

Doug Quixote :

07 Feb 2012 6:43:40pm

Dear Bogan from WA, not at all. After the nationalisation the policy would have changed soon enough, and a new start made without all the baggage from the then-ownership, probably mostly British at that time.

Governments probably should not actually run this sort of business, but they can start the ball rolling and then regulate later.

W.A Beau-Gann :

07 Feb 2012 8:34:08pm

No the Government would not have reprivatised after nationalisation.

To think that a Government would go through the political pain of a nationalisation then sell it off again is just not logical on so many levels.

Nationalisation would have stayed until a financial crisis occurred. Only then would a reprivatisation would be considered as one of the options.

Gina O'Donoghue :

08 Feb 2012 11:05:33am

Well did did sell us back Telstra that we already owned, think about it

R.Ambrose Raven :

07 Feb 2012 11:01:18pm

"I can just hear every economist listing what is wrong with such an idea."

Is W.A. Beau-Gann completely unaware that the said economists advocated policies that created the Great Recession, were taken completely by surprise when it occurred, and four years after it started remain clueless about a remedy?

A very quick and reliable endorsement of the merits of another publicly-owned Commonwealth Bank is the ferocious opposition to the idea by Hard Right lobby groups like the Institute of Public Affairs.

There are numerous philosophical and practical reasons why governments should own banks. For starters, if Australia Post became a bank, the cross subsidy and transfer-pricing issues would benefit the public rather by reducing the profiteering and price-gouging of the current Big Bank oligopoly.

Obviously the ideological parameters of such a bank would conflict as much – perhaps more - with those of any contemporary Labor Government as it would with any Coalition government. Since Whitlam’s time, Labor governments have been desperate to portray themselves as fiscally responsible, which means seeking and receiving the endorsement of the financial elites.

We need to come out of this with a much greater recognition of the central need for government, a determination to purge it of the economic fundamentalists who’ve done so much damage over the last two decades, and their permanent shaming and humiliation, starting with Hawke. Forgiveness may be Christian, but is deserved only by those who genuinely repent.

Sydneysider :

07 Feb 2012 5:45:23pm

How true.

tony garner :

07 Feb 2012 6:00:25pm

The CBA was state owned. Banks in Adelaide and Perth were state owned and failed dismally and had to be rescued by private banks. I cannot think of any state bank which has been a success. The four pillars, much though wa may hate them, have certainly been successful.

what are you thinking?

Trevor Passfield :

07 Feb 2012 8:34:41pm

The big four were the only ones supported by the taxpayer after the GFC & their CEO's & other top staff benefited. We take the risk & they make the money.

barry :

07 Feb 2012 11:47:05pm

Wrong Trevor, the real money from the Australian Office of Financial Management went to and still goes to providing funding for the little lenders somewhere in the order of 40 billion of government provided funding keeping the little guys in the mortgage market.

.......time is nigh to break up the Big4 .........

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  • doyla66
    doyla66 Wednesday, 14 November 2012

    Brilliant information, Yoda. Thanks. At least there are quite a few in the community who do know what's going on in banking. More informed debate is needed - maybe even a Great Debate on ABCTV to tackle the Bank issues that are annoying everyone. Anything that gets people questioning the way bank business has been propped up to the detriment of appropriate use of tax payer money for services would be a good start.
    Break up the big banks and discourage the use of securitisation/fractional banking etc until we get this back on track. I don't support govt guarantee for deposits either, nor the apparent compulsory use of a bank account for receiving wages, Centrelink, etc.
    If this situation is the result of the current policies then something has to change radically in our thinking about Banks. They are not a protected species and if they can't manage their financial affairs just like any other business then they should be allowed to fail. Maybe that would get the bankrupcy laws changed. :D

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