Senate banking inquiry

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Oh dear! We have a Senate inquiry looking at competition in the banking sector.

Only in Australia, following a global financial crisis, would we have an inquiry which focuses completely on the wrong issues. We should be looking at our system of financial regulation. As I have noted before, the fact that the federal government underwrites our banks means that we need to reconsider the range of activities (insured) banks are allowed to engage in. Once these new rules are sorted out there may or may not be a competition issue in banking – but we cannot say at present.

So we need a banking inquiry – but can it be the right one?

10 Responses to "Senate banking inquiry"
  1. This is the wrong perspective. We need to address the crony capitalism of having the banks underwritten by the government, not how we can extract the most bang for our buck under this egregious arrangement. You have written in previous posts that this government guarantee is inevitable and we should move onto ways of making the terms more explicit and priced correctly. I view this as a cop out. Of course it is politically challenging in the short term to explicitly forbid a guarantee, but it is nonetheless the preferred model for properly functioning capital markets and worth advancing intellectually.
    Also you want competition in banking? Start by reducing the barriers to entry. Banking is the most heavily regulated aspect of financial services, which in turn is the most heavily regulated aspect of the economy. The fact that it is not viable for a small business to conduct a banking operation because of the deadweight costs of regulation shows how competition can be improved in this sector by removing regulation, not adding more. The test of a competitive market should be that an individual operating a venture not be placed at a competitive disadvantage to a large corporation merely because of the costs of addressing government regulation.

  2. Too many people are looking at the need for competition in the Australian market. They’re wrong! With 20-22 million people in Aus, we can only support an oligopoly of four or so and that’s what we have. The same would go for whatever remains of the AWB, however that’s working these days. If you accept ALDIs and IGA, it’s what we have in the supermarkets. Too much competition puts too many people at risk. A bank loses all its money somehow, people wont blame the bank, they’ll blame the government because the government should have done something to protect us. People will then go back to putting their money under a mattress. The last thing we want to do in Australia is deregulate the banking sector, the excessive deregulation (lax regulation) is what caused the crises in the US to start with.

  3. The only thing that caused the US housing bubble and fragility of the finance system more broadly is the increased interference in private sector lending by government which had occurred in the preceding years. For example;
     

    Central bank manipulating interest rates downwards and masquerading printed capital as real capital (see Austrian view)
    Community Reinvestment Act and affirmative action in lending (particularly clinton changes)
    Freddie & Fannie (Implicit, now explicit government corporations providing non market based liquidity to RMBS)
    Basel regs standardising risk and introducing a systemic ‘model risk’ which exploded when gaussian copulas were proven inadequate. (Effect of which was that we avoided occasional periodic bank failures in exchange for infrequent systemic banking system failure) – See also nassim taleb

    All of these causes are functions of government interference. The statement that “the government should have done something to protect us” is the most disappointing theme of modern politics. Not only is this type of thinking responsible for crony capitalism prior and post GFC, including Hockey’s proposals, but also for actions such as the Afghan & Iraq war.
     

  4. Lachlan, you’ve swallowed the kool-aid.  The first and last points are matters a reasonable, informed person can genuinely debate, but the second and third are demonstrably factually wrong.  Only a tiny proportion of lending was under CRA – this meme is a desperate attempt to blame the poor rather than the rich (with more than a little traditional US racism in the mix too).  And Fannie Mae had very little to do with the dogy products being offered in the CDO market.

    Financial bubbles and consequent real economic crashes have long predated government interference in financial markets – in fact the causality runs the opposite direction to that which you imply. Government interference did not cause the bubbles and crashes – the interference is BECAUSE of the bubbles and crashes. 

  5. Quite right, DD.
    See Nicholas Gruen’s post, in which he cites evidence that the sub-prime mortgage industry was lending $600 billion a year at the height of the housing boom to borrowers with poor credit histories, and the industry’s Congressional campaign contributions rose by 80% between 2002 and 2006. Essentially the federal legislature had been captured by the industry.
    Canada is another notable country where the banks survived well. Like Australia the industry is something of an oligopoly. Comparison of the regulatory regimes here and in Canada would be interesting.
    As far as barriers to entry into the banking industry are concerned, the experience of the Australian Bank and Macquarie Bank, both starting in the early 1980s, is interesting. The former started from scratch, the latter was based on the tiny presence of Hill Samuel. The former took a competitive position of being in essentially the same business as the major domestic banks but inevitably a lot of the business it picked up was stuff that the majors turned down. Finally its losses became too much. This is despite the fact that it had a number of very competent executives who went on to have strong careers in the industry.
    Macquarie took a different tack of looking for unoccupied niches. It sponsored the dominant cash management trust account market. At one stage it was castigated by the Reserve Bank because it had a notice in its sole shopfront office saying “No cash held on the premises”, it was a major securitiser for Aussie Home Loans, and so on. It has since continued in that vein, seeking profitable niches.
    There are street banners in Sydney this week celebrating the 25th anniversary of Citibank in Australia. (It actually arrived in the early 1970’s when it bought a 50% shareholding in local finance company IAC.) Considering the tiny inroads that Citibank has managed to make in the Australian retail and small business market after a quarter of a century or more, you have to concede that there are large barriers to entry, but they don’t seem to have much to do with legislation.

  6. Maybe, just maybe, we Australians borrow too much money? Maybe when we are savers, not borrowers, like the Germans or Swiss, we’ll learn to love interest rate increases! Unfortunately, until then we are left with both parties promising (hoping) to keep interest rates low while in government, and the populace holding them to ransom when they don’t. Sennexx has it – we can have a small, safe banking sector with perhaps high profits, or higher risk. That is the tradeoff. Give me safe banks, and if interest rates happen to be 50 basis points higher then so what. In fact, maybe we need less competition, higher interest rates and more affordable housing as a result?! But in a country where housing price to income ratios are now higher than any other OECD country it is not surprising that there is such a focus on interest rates, to the detriment of other more important macro issues.

  7. Lachlan: On the issue of a government guarantee, the government has a product that the private sector cannot itself supply – trusted crisis stability.  It is fair enough then that the government should supply this product – for a fair price – because it is a product that would be otherwise unavailable.

  8. But Mark, Aussies are savers… we just don’t use banks, we use superannuation (a.k.a pension funds).  Of course, some not insignificant portion of said super funds would be invested in bank shares, so we are all benefiting from their surging profitability (indeed we should perhaps all back off from the anti-bank hysteria so as remove some of the uncertainty regarding future regulation which may be keeping their share prices down).
     
    I suspect there is also a dispersion issue with the bank deposit holders, as they are more likely to hold small deposits relative to the hefty mortgages many of us carry…

  9. DD – the CDOs itself did not cause the crash… it was the underlying assets which was dodgy. What cuased it? Of course one could argue that it was human greed… and I think bnaks are likely to get greedy and take on more risk if they have to compete more. Why not grow a banking sector that can compete internationally, and if we have to pay 5o basis points more so be it… because I am sure we will be creating more jobs thus improve our overall wealth.
    The reason most are grumbling at the moment may perhaps be high mortgages, and maybe, just maybe that has been caused by cheap credit and “liquidity”. I for one do not believe we need to focus on pushing our real estate values much higher, and would rather focus on buidling world class companies – our banks are some of the strongest in the world at the moment… maybe its time to expand, rather than force them to shrink.

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