It’s bank rentier day today with the finance lobby announcing it will pursue the tried and true method of muddying the waters are the Murray Inquiry:
Australia’s banks will argue the Financial System Inquiry botched its determination of their capital levels when it found they hold around the same amount of equity as global banks. This finding supported the inquiry’s suggestion that banks be forced to hold more capital, reducing their return on equity.
The banks will also use their second-round submissions to the financial system inquiry to argue it exaggerated the level of systemic risk created by high levels of housing lending and that ring-fencing banks’ retail operations is unnecessary. They will also defend the vertically integrated banking model that allows banks to sell financial advice, despite chairman David Murray arguing it creates conflicts of interest and reduces the quality of advice.
The capital charge debate is the really big one. Chris Joye responds at the AFR:
There is mounting evidence that neither David Murray nor Treasurer Joe Hockey are going to be soft-touches on Australia’s major banks…
Sources who have spoken to both men suggest the Financial System Inquiry’s final recommendations on the extra equity capital required to, firstly, compensate for the four majors’ “too-big-to-fail” status and, secondly, reduce the enormous “risk-weighting” differentials enabling them to carry less than half the capital of competitors when lending against housing, could surprise with their policy purity.
Both men reject the proposition tendered by the major banks that they are already better capitalised than similarly sized institutions around the world, and are inverting the “funding Australia” meme the banks have advanced to protect their internationally lofty returns on equity.
…The logic is that additional capital and less leverage means the majors will be able to raise money more easily during crises and reduces the likelihood they have to draw on taxpayer guarantees. As structurally less-risky concerns, they should also pay less for their debt and equity capital.
There are two issues here but only one is being addressed. The first is is it right that the big banks dominate competition in the name of “funding the nation”. Obviously not, and on that score I accept that the Murray Inquiry could be operating with integrity.
The second question is what role are the banks playing in creating the “funding gap” in the first place. The Murray Inquiry only mentioned in passing the tax regime that favours housing speculation and also completely whitewashed the issue by declaring that it can be dealt with via budget surpluses (and therefore guarantees).
Yes, the inquiry could potentially crimp the funding gap if the big banks’ housing capital breaks are wound back but only if nothing is raised up to fill its place and on that front the inquiry also discussed the possible extension of mortgage capital discounts to mid-tier banks, and the potential extension of government guarantees to non-bank lenders.
In short, one interpretation of the inquiry is that it is shaping up as an attack on the big four bank’s privileged status within the politico-housing complex but that the complex itself will persist quite happily as competition issues are largely dealt with through the elevation of smaller banks and non-banks to the same level of privilege, all of them now too-big-to-fail, including the Yellow Brick Road, the parent firm of Joye’s own directorship
There’s no getting around the simple truth that you either deal with the current account model of growth or all you are really doing is politely discussing how to divide up the economic rents available to the financial system that drives it.
The hilarious part of it is that as the probability grows that Australia’s sovereign rating is going to be stripped early in the next cycle then we’re going to need another Murray Inquiry in no more than a few years.
