You’ve gotta love the myopic view of former Prime Minister, John Howard, who yesterday called a proposed Royal Commission into the banks “rank socialism”. From The Australian:
Former prime minister John Howard has slammed a royal commission into the banks as “rank socialism”, warning the Coalition that embracing such a policy would damage the Turnbull government’s fortunes…
“Our banks demonstrated in 2009 that they were among the best-run, the most prudentially supervised, and the most well-capitalised in the world,” Mr Howard said.
“I say to my former colleagues and the people I still support, don’t embrace a royal commission…”
Regular readers know that MB supports a banking Royal Commission (or a commission of inquiry) due to the numerous examples of bank malfeasance, including:
- damning evidence of bank manipulation of the bank bill swap rate, which the banks have shown no contrition over;
- the 1000-plus examples whereby borrowers’ loan documentation has been forged by the banks (see here, here, here and here), again with little remorse shown;
- overall dodgy lending standards; and
- the CBA money laundering scandal, which no doubt goes far deeper.
But what we find most interesting is Howard’s labeling of such an inquiry “rank socialism”. Given Howard hates socialism so much, then surely he too opposes the implicit taxpayer guarantee put in place since the GFC – essentially an insurance policy for the banks funded by the taxpayer? According to RBA research in 2015, these taxpayer subsidies have been worth around 20 to 40 basis points on average, implying that the majors capture an annual taxpayer subsidy worth more than $5 billion.
Does Howard support increasing the bank levy to between 20 to 40 basis points to recapture this subsidy and eliminate this form of socialism?
Let’s be honest, the Australian banking sector has been underpinned by multiple direct and indirect supports from the taxpayer, including:
- The implicit guarantees cited above, worth $5 billion annually;
- deposit guarantees;
- wholesale funding guarantees;
- multi-billion dollar purchases of residential mortgage-backed securities (RMBS) by the Australian Office of Financial Management (AOFM);
- Australian Securities and Investments Commission (ASIC) bans on short-selling;
- absence of ex-ante Financial Claims Scheme (FCS) fee;
- laxity of capital buffer requirements by the Australian Prudential Regulation Authority (APRA);
- reductions in risk-weightings, especially for mortgages;
- massive public stimulus;
- huge first home buyer grants, and
- opening the immigration spigot while relaxing foreign buyer restrictions post GFC.
Amid the growing list of scandals, there is only one way to force better behaviour from the banks: remove moral hazard by explicitly cutting them off from the taxpayer teet.
One way to do this would be to explicitly refuse to guarantee the banks. However, this could unduly endanger the economy, so a better option is to tell them that any future taxpayer bail-out would involve taking a public equity stake in the bank(s) along with conditions about our own board seats, remuneration ceilings and other conditions until the bank(s) can demonstrate that they no longer require public support.
The original 1997 Financial System (‘Wallis’) Inquiry explicitly stipulated that the Government should never provide a guarantee over the banking system. Yet, since the GFC we have witnessed a build-up of moral hazards that began when the Government first guaranteed the banks’ wholesale borrowings and deposits, and followed with the RBA stepping-up its repurchase agreement operations, providing the banks with substantial public liquidity support.
These measures heightened the expectation that the authorities would support the banks as required going forward, which the ratings agencies have acknowledged provides the banks with a two-notch ratings upgrade.
Ultimately, the Australian banking system has departed in a fundamental way from the recommendations of the Wallis Inquiry, with moral hazard now entrenched, and transparency and accountability lacking.
The same thing is on display from other former policy titans today:
Former Treasury secretary Ken Henry has issued an extraordinary attack on the Reserve Bank’s framework for setting interest rates, as the nation’s top bankers said a deluge of new regulations and the prospect of a royal commission were throttling their ability to remain internationally competitive.
At an exclusive summit convened by The Australian in Sydney yesterday, Commonwealth Bank chief executive Ian Narev, the chairmen of National Australia Bank and Westpac, and Australian Bankers Association chief Anna Bligh said mounting regulation — which now makes up more than 70 per cent of the NAB board’s agenda — was endangering the stability of Australia’s banking system.
In an unusual move, Dr Henry, the NAB chairman, said regulators should have done a better job recently explaining it was their attempts to cool housing markets that forced banks to lift rates on interest-only investor loans.
“I will probably get myself into trouble,” he said. “We do need to have regulators out there explaining why they’re taking the regulatory action they are taking. And they also could do us all a favour … by explaining that they do expect these things to have an impact on borrowing rates.”
He said the Reserve Bank’s 20-year-old practice of independently setting the cash rate each month had misled people into thinking the RBA controlled mortgage rates.
“There is a very poor understanding of what affects market interest rates in Australia today,” he said. “The Australian population has become conditioned to the idea that banks should adjust mortgage interest rates only if and when or as the overnight cash rate of the interest is adjusted.”
“I don’t believe it is driven by what they consider to be the public interest but about what they perceive to be a political opportunity,” he said.
Ms Bligh said banks were facing “the most intense period of reform that the banking industry has seen in Australia since its inception”. A new banking executive accountability regime has given APRA the power to fine executives and amend pay practices it does not like, while the government has tasked the Productivity Commission with investigating competition in the sector.
Is this Ken Henry the policy doyen talking? Is it Anna Bligh hero of the QLD floods? Or is it paid shills of the banking system? It’s not an idle question. It goes to very heart of the problem of our contemporary banking system.
Either these folks have to fess up and pay for the public support that they happily exploit. Or, it’s time to end the banking socialism and cut the taxpayer cord.
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