Late yesterday, the Labor aligned policy think tank, Per Capita, released a new study into bank competition. Banking Day has a useful critique:
Yesterday’s “What Price Stability” report from centre-left think tank Per Capita contains one claim the Big Four will like: they should be left in peace to set their rates. And it contains a second that they probably just won’t care about: that the appropriate step for a government concerned by their profitability is to set up a new no-frills, online-only, government-owned bank for low-income Australians.
This is pretty much exactly the one banking reform the Government won’t touch with a long pole. Not only would it require a heap of funds the Government doesn’t have, but the Per Capita report makes a thin case that it would do anything to reduce the Big Four’s fairly impressive margins.
Per Capita’s case is founded on three market failures. Its proposed government bank would do remarkably little about any of them.
• The report says that most customers are reluctant to move banks, which is true. It then suggests many low-income Australians would, nevertheless, be eager to move to an online-only government-owned bank, as opposed to getting a cheap, no-frills account from their existing bank or from an internet-centric competitor like ING.
• Echoing the common argument, the report says government provides an implicit guarantee to the banks. The policy argument for providing at least some support to banks in a crisis is relatively straightforward: bank-runs are themselves a form of market failure. As Per Capita points out, global regulators have been increasingly seeking “resolution regimes” which let bank shareholders lose their dough and bank managers lose their jobs while minimising the knock-on effects. But Australia’s prudential supervision system pretty much does this already. (Our system is arguably too protective of banks’ creditors, but the report pays no attention to this.)
• Per Capita notes the concern over the trade-off between bank competition and bank stability. It doesn’t explain how a government bank would help solve this dilemma. You might think the report would mention that our last big failed bank was government-owned – the State Bank of Victoria. You might think that, but you’d be wrong.
The notion of a government bank to compete with the banking sector is not quite as barmy as BD makes out. It was an idea championed by James Tobin and it is a way for government to add new credit controls via competition pressures. For instance, in setting its deposit and lending rates, a government bank forces competitors to respond. Not a bad idea in theory but it depends very much on the government bank being in sensible hands, which in this country there is absolutely no chance of (at least currently). You can imagine the kind of credit-fest an Australian government bank would embark upon, as they did in the past.
But back to the Per Capita report, BD misses its real flaw, which is that it completely lacks economic context and as such simply assumes that Australia can carry on as it has always done with no repercussions for banks or the economy. A report such as this should begin with first principles:
- what kind of economy do we want in twenty years?
- where will the current banking system take the economy?
- what changes in policy will shift us from point two to point one?
