Future Fund chairman and former Commonwealth Bank CEO David Murray is on the hustings this morning beating up on regulators for causing the banks to have to cut costs. According to the AFR:
…it is “blindingly obvious” that there will be further job losses in the banking sector, saying the lower demand for credit gives some financial institutions no other choice.
…Mr Murray, who was chief executive of CBA for 13 years, also said that politicians should first look at “ill-conceived” regulations they had imposed on the sector before criticising banks for laying off workers. “The only place they’ve got to go is their cost structures to deal with the problem,” he said.
“It’s absolutely obvious that this is what they have to do.”
…Mr Murray argued it had been clear since the financial crisis that banks would have to deal with lower credit growth as businesses and households paid down debt.
But he also took aim at new regulations designed to make banks safer as being a key cause of the sector’s woes and backed warnings by ANZ chief Mike Smith and former CBA chief Ralph Norris that the rules were undermining the economic recovery.
“The re-regulation of the banks and the bashing of the banks in response to the crisis has been a very ill-conceived approach to dealing with the problem,” he said. “They’ve tightened capital ratios at the same time as overseas funding is hard to get and credit isn’t growing very much and banks are getting more cautious. That’s not what you want to happen.”
Mr Murray said it would take 20 years for the world to work out the problems thrown up by the financial crisis. “People think I’m being negative but I think I’m a realist,” he said.
“The restructuring effort is incredible because the leverage was so high – in the public sector and the private sector.
“It was governments who let it happen, so the governments blame the banks and that justifies all this re-regulation of the banks, they deleverage them at the time you want them to keep going as best they can, you bash them publicly and presumably now attack them for reducing their employment. It’s a mindless game.”
The Unconventional Economist has noted before that David Murray’s has a mixed heritage on these questions. It is certainly the case that in recent years he has been one of the most forthright (and correct) critics of Australia’s credit complex. But given his fomer position as head of Commonwealth Bank during its post-millennium household credit push, as well as its build up of huge offshore liabilities, that is no surprise. Perhaps some of that heritage is on display here because the reasoning behind his attack on bank bashing makes mixed sense at best.
I agree with Mr Murray that government played a big role in creating the crisis – certainly in “letting it happen”. But how so? In Australia it was two errors. The first was an overly enthusiastic embrace of financial deregulation, giving the banks too much leeway to grow credit. The second was to encourage that credit growth through pro-cyclical fiscal policies.
If that’s the case then it doesn’t make a lot of sense to criticise authorities for reversing course on some of these errors at a pace that the economy has so far been able to handle.
But you don’t have to agree with my interpretation of events to disagree with Mr Murray. His attack is also factually questionable. If, as Mr Murray suggests, authorities were to slow the drive for re-regulation through loosening capital ratios, how do you think that would effect the bank’s cost of funds? Would making them more risky lower the cost? Of course not. It would make it more expensive. Likewise, the ratings agencies are on the record describing government support for the banks as raising their ratings by at least two notches.
Then there is the question of whether it’s regulation that’s caused the lending slowdown or it’s slack credit demand. We’ve been told by the banks again and again that they have surplus deposits against which to lend. In my view, it’s a measure of both.
I’m not arguing that there hasn’t been any bank bashing by the government. I’ve been a vocal critic of the opaque processes of bailout that have surrounded the banks for years in part because of the absurdity of disguised government support generating an official expectation that the banks will toe the line for the public. Transparency across the relationship would be far better, including pricing for implicit guarantees. But that is not David Murray’s reasoning.
The fact is, in the post GFC context, Australia must reduce its credit dependence like everyone else. One way or another, that means shrinking banks. Blaming regulators for doing this job at a measured pace is unhelpful to the national interest.
