All hail the mighty banks

Banks have been in the news recently and there is a clear difference in the approaches of the government and the opposition. While some may suggest that Bill Shorten is being populist in his call for a Royal Commission into the activities of the banks, particularly the ‘big four’, it is clear that Turnbull’s approach of calling them before the parliament’s Economics Committee once a year has been a sham. 

Ian Narev, CEO of the Commonwealth Bank, was the first to appear before the committee and set the tone for the CEOs of the other ‘big four’ to follow — they sang from the same hymn sheet or, dare I say, had colluded beforehand to ensure the substance of their answers was so similar as to be almost the same.

There were apologies and promises to do better. There were mea culpa but of limited culpability when examined carefully.

Shayne Elliot from ANZ admitted (from The Guardian’s live blog of the inquiry):
I think as an industry we have lost touch with our customers. It’s taken us down a path that’s created bad behaviour, some poor culture and really not treated customers with the respect they deserve.
And Brian Hartzer from Westpac said:
It is clear that a trust gap has opened up, and we as an industry and as individual banks need to work to close that gap.
Generally, each bank claimed commercial confidentiality not to reveal the profit they made from housing loans or credit cards although ANZ did suggest that its profit from credit cards was only ‘a couple of hundred million dollars’ out of its total profit of $7.5 billion.

While a number of financial planners who had given customers bad advice had been dismissed, it became clear that not one manager or executive had been fired or resigned as a result of some of the banking scandals. Whatever happened to executive responsibility, ‘the buck stops here’? — now blame is shifted down the ladder, not only in the banks but also in government (but that really requires another article).

The same argument about executive responsibility was raised in the US when Wells Fargo CEO John Stumpf appeared before a US Senate Committee after Wells Fargo staff, in an effort to meet sales and revenue targets, had been found to have opened millions of fake credit, savings and other accounts for customers without their consent. US Democratic Senator Elizabeth Warren, a former Harvard University law professor, said to Stumpf:
So, you haven’t resigned. You haven’t returned a single nickel of your personal earnings. You haven’t fired a single senior executive.

Instead, evidently, your definition of accountable is to push the blame to your low-level employees who don’t have the money for a fancy public relations firm to defend themselves. It’s gutless leadership.
It’s a pity our parliamentarians didn’t follow such a line. (Stumpf has since stood down.)

The banking scandals have been spread over a wide area of the banks’ activities.

ComInsure, the CBA’s insurance arm, has refused to make payouts on the basis of dubious medical definitions and has even rejected a coroner’s ‘cause of death’.

ANZ has allegedly been involved in rigging the ‘bank bill swap reference rate’ (BBSW) which is used to set interest rates on business loans, also influences credit card and other loan rates, and is the rate at which banks lend to each other. This is similar to the LIBOR (London inter-bank offered rate) which has world-wide implications and four London traders have recently been gaoled for their role in rigging the LIBOR.

And banks have conceded their wrong doing by paying compensation to some of those who were affected by faulty financial planning advice.

Earlier this year at a Senate inquiry into white-collar crime, two economists presented an argument that banks were regularly fudging the numbers relating to clients’ income when making mortgage loans so as to make their loan portfolio appear ‘safer’.
The banks have trashed their lending standards over a prolonged period of time with significant evidence of banks massaging people’s incomes in their loan application forms to make them look more creditworthy than what they really are, which is essentially fraud.

The banks would do this for various reasons. One is the highly competitive environment between the banks. Second of all is profitability.

The safer your mortgage book looks, the lower it costs you to do business — simple as that. If you show that your borrowers are very creditworthy then you are going to get cheaper funding costs, and that’s a win-win for the bank …
Some of this results from the pressure on staff to meet sales and revenue targets. The Finance Sector Union surveyed its bank members on this and one member responded:
Managers have told us to tell clients certain things in order to get results that will generate bonuses for everyone.
The FSU’s Geoff Derrick said:
[staff] … are being pushed to deliver on sales targets to the point where some feel that they have no choice but to do anything they can to keep managers off their backs, including selling bank products to consumers who don’t need them.
Despite all that, the government’s decision to call the banks before the Economics Committee was based not on those scandals but the banks' decision not to pass on in full the RBA’s last decrease in its cash rate. The ABC provided a calculator to show how much additional interest people were paying on mortgages owing to decisions taken by the banks on interest rates. An example of a CBA mortgage of $300,000 over 30 years taken out in 2011 shows that in the last five years the person would have paid $5,214 in additional interest, made up of:
  • $1,745 because of additional rate rises outside the cycle of RBA rate increases
  • $228 from delays in the bank passing on RBA rate cuts
  • $3,241 from the bank not passing on the full RBA rate cut
The result of the banks’ decisions on interest rates is that they have increased their margin above the RBA cash rate. In 2011 the mortgage rate was on average about 3.25% above the RBA cash rate but in 2016 that had risen to 3.75%. Half-a-percent may not sound like much but when we are talking in billions of dollars it soon adds up to significant amounts (0.5% of 1 billion dollars is $5 million, so on a profit of $7 billion at least $35 million of that could be from this increase and that is just profit — the resulting increase in income would be many times higher).

Before the Economics Committee, the banks consistently listed many reasons for this embracing the actual cost to them of raising funds, including overseas funds, the requirement to hold more cash reserves, and pricing risk into their products. Since the GFC, however, the ‘big four’ have operated with a government ‘guarantee’ which, it has been estimated, saves them 0.2% on their borrowings compared to smaller banks — again a tiny percentage but amounting to millions when we are dealing with billions of dollars.

The banks also consistently rejected further regulation with arguments such as the cost of regulation would need to be passed on to customers or that there could be unforeseen consequences. They suggested that strong banks (read profitable) are necessary for a strong economy.

The government still thinks a Royal Commission is not necessary and instead announced a banking tribunal which customers would be able to approach with complaints without the need for lawyers. One consumer group suggested, however, that decisions of such a tribunal would likely be subject to appeal in the courts (as are decisions by the Administrative Appeals Tribunal) which would then mean the banks, with all their money, could tie up issues for years in the court system.

But why should we be surprised by this? It has been going on for centuries. Lehman Brothers (before its collapse) had identified that there were 11 banking and financial crises in the eighteenth century, 18 in the nineteenth century, and 33 in the twentieth century.

In Australia early in the 1890s there was a banking crisis, including a ‘run’ on banks (people withdrawing their deposits) and a number of bank closures. It was at its worst in Victoria and had been fuelled by a boom during the 1880s with increasing speculation and investment in the property market. At the time the financial sector was essentially unregulated and factors contributing to the problem included:
  • property market speculation
  • credit growth
  • unrestricted capital inflows from overseas
  • the degree of risk management within the financial system (with risk assessment being lowered to cash in on the boom)
  • competitive pressures in the financial system (which also contributed to lesser risk assessment as banks and building societies fought for their share of the boom)
Overseas factors led to a reduction in the inflow of capital, property prices crashed and the system came crashing down.

If that sounds familiar, it should. Mortgages have grown in importance in recent decades as a source of bank business and now represent 57% of the loan portfolios of Australian banks (up from about 30% a couple of decades ago). That core of property underpins the banks’ capacity to borrow overseas. Low interest rates have encouraged borrowers and allowed them to borrow larger amounts (also contributing to rising house prices). Using negative gearing and capital gains tax concessions, people have also invested in property, further fuelling the market. Competition between the banks, and the low interest rates, have encouraged the banks to lower their risk assessment of potential borrowers and, as suggested earlier, even led to ‘massaged’ income figures.

As in the 1890s, it will not take much to cause this system to crash. An increase in interest rates (becoming more likely) may well impact borrowers who have borrowed to their maximum capacity — encouraged by the banks — leading to loan defaults and pressure on the banks.

The risk is increasing and only a few days ago APRA (Australian Prudential Regulation Authority) issued an information paper on Risk Culture and indicated it would be taking a more intensive approach in its reviews of risk culture within financial institutions, including the influence of bonus payments.

In the latter half of the 1940s Ben Chifley moved to nationalise the banks by bringing them all under the then government controlled Commonwealth Bank. Although that move was not successful, some of Chifley’s comments in support of his action remain relevant:
Whatever regard they may claim to pay to the wider concerns of the nation, their policies are dictated in the last resort by the desire to make a profit and to secure the value of their own assets.

Experience of the past has been that private banks increased their lending in good times and contracted it in bad times …
He said that in 1931, as the Depression bit, the ‘trading banks refused to cooperate in proposals by the Commonwealth and States for the relief of unemployment and the revival of business activity’. Rather than helping provide a stimulus the banks had restricted new lending and called in loans, exacerbating the situation. ‘This should not be allowed to happen again,’ he said.

Chifley correctly saw that the flow of money was a major factor:
No single factor can do more to influence the welfare and progress of a community than the management of the volume and flow of money. Mismanagement of money, on the other hand, has contributed to the greatest economic disasters of modern times — booms and slumps, mass unemployment, waste of resources, industrial unrest and social misery.
The current neoliberal emphasis on the ‘free market’ means governments still do not have control of the flow of money and we are still subject to the booms and busts often caused, respectively, by capital inflows and lack of such inflows.

The banks in Australia did not cause the GFC but the collapse of the financial system in the US led to the drying up of capital on international money markets, restricting the ability of our banks to borrow necessary funds. That led to our government’s decision to provide a ‘bank guarantee’ — and then also to spend money to stimulate the economy.

In a paper by J Bradford De Long of the University of California comparing the financial crises of the 1890s and 1990s, one of his concluding remarks was:
A look back at history shows no easy way of controlling the macro-economic instability that large-scale capital inflows create. History does leave clues that a strong, credible, and credited commitment to unalterable exchange rate parities would do some good but we do not know how to create such a commitment in the age of mass politics by any means short of dollarization.
(‘Dollarisation’ refers to linking all currencies to the US dollar as was done in the Breton Woods agreement following WW2, or in some cases even adopting the US dollar as a national currency.)

So our banks are causing us problems — nothing new there. Our banks are contributing to a property investment boom that may not be sustainable — nothing new there. Any reduction in our banks’ ability to borrow overseas may lead to a credit crisis here in Australia — nothing new there. Our banks insist they will pass the cost of regulation on to us, their customers. The neoliberal economic approach adopted by our current government means it will not increase regulation so the banks will be free to continue as they are. The banks themselves claim, strong, profitable banks are necessary for a strong economy, and our government will not disagree even if the banks’ current profits are among the biggest corporate profits in Australia — in other words, the banks may be ‘strong’ but the rest of the economy isn’t.

While many things have changed in the past one hundred and thirty years, it appears banks have changed little.

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24/10/2016" The current neoliberal emphasis on 'free market' means governments still do not have control ...... " says it all and is where the 'free market' and their bidders engage with much effort and money to exclude governments from making decisions detrimental to the interests of big business. At what point do the the excluded governments and therefore the voters react. Its a precarious balancing act and the banks together with big business in general and the public will feel the pain if it all goes wrong.


24/10/2016Nice article Ken. The 'real' difference between Australian and overseas banks in the era of the GFC was that while Hawke and Keating had to a large extent completely deregulated the financial industry, they have left some ability for the government to maintain oversight. In the US, when Reagan deregulated the banks, there was not enough oversight. Luckily, Howard and Costello, despite the wishes of the 'over regulated' (their words) banks either knew enough to keep the oversight or took advice from those that did know with the same result. Even then a couple of Australian Banks almost went down during the GFC, with regulation flagging the problem early and larger banks being encouraged to buy out the smaller ones.


24/10/2016Golly No doubt about it. The neoliberals see almost no role for government other than (as I have pointed out in other articles) the protection of private property rights and the economic transactions that arise from private property. We are seeing some reaction by voters overseas but, unfortunately, some of that reaction embraces even more right-wing positions. So we are in a difficult time and unless governments reassert their authority in economic issues, there will be more disillusion with the economic and political processes.


24/10/20162353NM Sorry but your comment wasn't showing when I began my reply to Golly. Yes, Australia has maintained a better regulatory system than the US but I think Chifley's comments get to the core of the issue. While regulation is important, there is also an issue about government being able to influence bank 'policy' for the benefit of the country as a whole. The banks hindered recovery during the Depression because they would not cooperate with government policy. When we allow that, the government is losing influence over the financial sector. While nationalisation may not be the answer, it does pose an interesting dilemma for which we do not yet have an answer.


25/10/2016I think the attitude of banks has not changed much but over the last 30 years they have introduced new technologies and new products. It astounds me that they have managed to make so much profit from payments in particular with credit cards. At one time a cheque might have cost 20 cents which included the bank transporting these pieces of paper around to move money between accounts. Now with credit cards they are charging extortionate rates on borrowings and a percentage of the revenue is taken from the merchants on every sale.


25/10/2016Nat Welcome to TPS. As I suggest in my article, it is not just 30 years but even 200 years or more in which banks have changed little in their approach. As you say, the technology may have changed, the ability to jmove money almost instantly, but still the banks are screwing us to maximise their profits. They do charge exorbitant interest rates on credit cards after also, as you point out, charging the merchants - that's no doubt a win-win for the banks. And in their rush to maximise profits they have in the past, and will again, create economic instability.
How many Rabbits do I have if I have 3 Oranges?