Banks are playing a dangerous game: Maley

Commonwealth Bank boss Ralph Norris is playing a dangerous game with his decision to lift home loan and business lending rates by almost twice as much as the Reserve Bank’s official interest rate rise.

Treasurer Wayne Swan left little doubt he was furious with Norris’s move, labelling it a “cynical cash grab”.

It was, he said, “no wonder Australians are so angry with our banks after watching the behaviour of the Commonwealth Bank.”

More ominously, Swan indicated that the government would soon unveil measures to try to rein in the banks.

But Norris is betting that the government will be largely hamstrung when it comes to introducing new controls on the banks. He knows that Canberra is deeply committed to the idea of a deregulated financial sector, and would be extremely reluctant to introduce new curbs on the banks.

His confidence may be misjudged.

Canberra is all too aware that the big four banks were able to take advantage of the global financial crisis to increase their market dominance. Regulators were so preoccupied with preserving the stability of the financial sector that they turned a blind eye to the issue of bank competition. As a result, Westpac was allowed to proceed with a $18.6 billion takeover of the country’s fifth-largest bank, St George, and the Commonwealth Bank was allowed to purchase BankWest, which had been an important player in the home lending market.

Now politicians and top bureaucrats look around and see that the country has been left in the unsatisfactory position where four large banks completely dominate the financial landscape. Outside these big four banks, the rest of the sector is extremely fragmented.

Canberra has clearly decided that the big four banks should not be allowed to get any bigger. And that’s why National Australia Bank was blocked when it sought to acquire the local operations of AXA Asia-Pacific.

But Canberra knows that the banking problem run even deeper. Because the big four banks are already so large, it’s impossible for them collectively to grow at a faster rate than the overall economy. For one bank to enjoy higher growth means that they have to take market share off the other three, and the big banks appear deeply reluctant to do this.

It’s clear from recent comments by the banks that they’re dissatisfied with the rate at which their lending is growing. And this is backed by recent statistics from the Reserve Bank which show that while total bank lending for housing is relatively strong (rising by 0.6 per cent in August to reach a level that’s 8.1 per cent higher than a year earlier), total business lending actually fell by 0.4 per cent in the month (and was down 4 per cent from a year earlier).

Faced with weak lending growth, the big banks will only be able to continue to report increases in their profits year after year if they are able to maintain – and preferably build – their interest margins.

But this means that the banks are inevitably on a collision course with the rest of the community.

The problem for the banks is that these frictions are growing at a time when there’s an increased sense of the debt that bankers owe to the community.

One consequence of the financial crisis was to make it clear that banks enjoy a huge taxpayer subsidy because they have an implicit guarantee that they will not be allowed to fail.

This implicit guarantee allows the banks to fund themselves at much lower rates than they would otherwise be forced to pay, which helps boost their underlying profitability.

As the Bank of England boss, Mervyn King, warned in a speech last week, banking regulators are determined to introduce additional regulatory measures that will protect taxpayers from having to foot the bill for future banking collapses. As a result, banks may be forced to boost their capital reserves more than currently envisaged, and may face additional restrictions on how much leverage they are allowed.

At the same time, we’re also seeing the German government’s determined move to protect German taxpayers from having to pick up the bulk of the cost of bailing out big-spending eurozone economies, and to force bankers and bond holders to shoulder more of the losses.

Overnight, the German finance minister, Wolfgang Schaeuble, brushed aside concerns that German plans are forcing the borrowing costs of Ireland, Portugal and Greece to rise sharply.

Instead, he argued that letting bankers and bond investors rely on taxpayers to bail them out, increased the risk of “irresponsible” debt and investment decisions.

And he added that forcing taxpayers to shoulder the burden alone risked triggering “a dangerous social time bomb” of popular dissatisfaction.

Norris’s decision to thumb his nose at Canberra comes at a time when politicians and regulators world-wide are becoming increasingly conscious that deregulated financial markets only work because they’re ultimately underpinned by taxpayers – and that this may require a re-writing of the rules for bankers.

This article first appeared on Business Spectator