From David Murray today at the AFR:
The idea that the major banks should be broken up should be considered in the context of the unique features of the Australian economy. It must be evaluated by reference to competition, prudential soundness and the national interest.
With a small population and large land mass, Australia has been an importer of capital to fund development for all of its modern history. Our high relative wealth evidences the value of the use of foreign savings. But it is not without risks, as we found out in the depressions of the 1890s and 1930s. Funding risks in the GFC required the Commonwealth to guarantee the obligations of all banks.
…Banks manage this by augmenting domestic deposits with foreign debt so they can meet demand for credit in the economy. When a systemic crisis affects the rest of the world the local banks can have a funding shortfall – requiring the intervention of the Reserve Bank and potentially the Government. This is why the Australian Government needs to maintain a strong credit rating in global markets. To do that, and in view of the net foreign liability position, a sound fiscal position is necessary. A strong Government credit rating enables the banks to maintain good ratings but not all banks. In practice only those of sizeable scale, strong balance sheets and track records of sophisticated management can maintain access to foreign markets.
To break up the major banks would risk access to debt markets and stifle funding of the economy. For these reasons continuation of the “four pillars” policy and renewed emphasis on competition (as recommended by the FSI) is the best course.
The issue is not scale, except to the extent that too-big-to-fail ensures government guarantees for banks. Thus the issue is credit worthiness, either whether a bank is big enough to warrant tax-payer support or has such a strong balance sheet that it can match a publicly-backed credit profile.
By definition, for a bank to have such a strong balance sheet it will need to be holding a lot of capital. That, in turn, will very likely slow its lending. So David Murray is right that breaking up the banks would likely result in less lending even if smaller banks wanted to access global funds.
You may have noticed, however, that that is different to “risk[ing] access to debt markets”. Better put, it would be shifting risk to bank balance sheets so that access to debt markets was no longer so pressing.
In short, for a guy that has done good work aiming to give risk back to the banks and shift Australia away from its foreign funding addiction, this is a rather circumscribed view.
