The recent economic problems in the US and Europe have re-opened discussion of the role of banks within our economy, and particularly on the issue of whether they enjoy implicit government support. The shorthand for the issue is usually expressed in asking whether banks are too big to fail.
The current debate lacks any sensible context. Normally public discussion of government support for industry is couched in terms of industry policy and that seems the natural framework for discussion (implicit) support for banks.
The Govertnment supports a wide range of industries through a system of explicit subsidies. We all know the cases of the automotive industry in Australia, and the case of protection for textile, clothing and footwear, but there is a wide range of industries which receive explicit support including the film industry, Tasmanian forestry and many others. Much of the support is explainable through interest group theory.
Identifying the areas of implicit government support is more difficult. In the US during the crisis, the automotive industry received significant government aupport, so did the insurance industry, and the securitisation industry, not just banking – much implicit support became explicit. The US government decided that firms in all those industries were too big, too important, too powerful or too interconnected to fail..
In a smaller economy like Australia, with a more concentrated commercial sector, it is quite possible that there are many more firms government would prevent from failing, and which are effectively enjoying implicit government subsidies.
It is hard to believe for example that Telstra would be allowed to fail, nor apparently could the ASX fail, and one wonders about AustralianSuper, AMP, AGL, Queensland Rail and many others. All these firms are probably enjoying implicit government subsidies. We have even seen government intervention to support aluminium smelters, as well as intervening to prop up the securitisation market to assist small financial institutions to stay in business. Size is clearly not the only relevant criterion.
In some cases, as with banks, the government imposes onerous regulation to offset some of its risk, but it does not do this on any consistent basis.
So what are the boundaries around the concept of implicit government support? This is at heart a deep question of public policy, which requires a structured framework for analysis, and not simply the ad hoc approach we currently pursue. The too-big-to-fail metric might provide one dimension of analysis but recent government behaviour has taught us that there are many more, and size alone may not be the most relevant as we have seen in the support of many small institutons.