Do we need a good bank?

Last week, I tried to sort through the whole bank nationalisation issue. For instance, one of the issues being discussed is whether toxic assets should be moved from private banks to a single public bank. It was hard to tell whether this was a good idea.

This week I am asking a new question: instead of the public bank being a bad bank, do we need it to actually be a good bank?

[DDET Read more]

First of all, what is a good bank? Aren’t our Big Four banks currently good? Well, they are currently big but that doesn’t necessarily mean good. And they are currently profitable but that also doesn’t necessarily mean good even if it does mean bad.

What would a good bank be? It would be a bank that in the present crisis, takes deposits and a guarantee and then tries to lend out responsibly by investing in borrower information. Put simply, I am not sure our current banks are doing this. There are widespread reports of credit rationing and also discussion that banks are tightening home mortgage requirements — for instance, moving back from 5 percent to even 20 percent equity gobbling up the government’s home ownership grants in the process. That is a real worry. After all, the government has guaranteed deposits. The idea is that those deposits get retained with the banks rather than put under a mattress. However, if the banks are expanding their mattresses, then what is it all good for?

That said, I don’t know what the banks are doing. But the question is: does the government? Surely a reasonable quid pro quo for all this bank support is greater transparency and information so the government can assess its risk exposure? For the commercial property fund, what is the banks’ current exposure to risk? How are banks distributing guaranteed deposits? Is there really credit rationing?After all, the PM says that the market system needs this transparency but I haven’t seen the legislative requirements for it. I must admit, I am not sure we are getting anything for our public guarantee in that regard. Surely, we should expect certainty in lending in return for certainty in keeping depositors with the banks?

In the meantime, the banks are trotting along very well. ANZ, for example, continues to expand into Asia. Bank CEOs continue to have high pay and high bonuses all because things are going well — in part, because of a lack of competition. In the US, there are calls for bank dividends to be suspended when banks get government assistance. Where are similar calls here? I am not saying there should be but how can we square hardship and risk of insolvency with actions that make it look like times are good? If there was a case for an industry where the ask for it and lose it test should be applied, surely it is this one?

It is time for our journalists to ask these questions:

  • What is the risk on commercial property?
  • What are the banks doing with deposits?
  • Have the banks changed their loan requirements?
  • Why is bank executive pay not yet cut to save money?
  • And what information are the banks providing the government?

In the absence of this, the case for a publicly owned good bank that does all of these things seems to me to be getting stronger and stronger.

[/DDET]

6 thoughts on “Do we need a good bank?”

  1. Yes, ANZ is trotting very well in the expense of its moral & legal obligations.

    Ask ANZ how many victims of Bullying & Harrassment & Discriminations were retrenched and how many cases were blindly ingored by HR & Senior Management.

    Before ANZ’s execs pay were cut, 1st of all, it needs to have a HR department that show basic respects to laws such as EEO, Confidentiality and Duty of Care; It needs to have more senior managers that have some basic moral sense.

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  2. The idea of “good bank” comes from <a href=”http://www.voxeu.org/index.php?q=node/2390#comment-363″> here </a> and <a href=”http://www.voxeu.org/index.php?q=node/2411#comment-370″> here </a>. You can spread the links. Prof. W. Buiter is definitely more authoritative and is working out some details. Soros is also urging U.S. to go in this direction.

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  3. This is a bit silly.

    So called bad banks or aggregator banks might be necessary when the banking system is holding such a large proportion of toxic assets that investors fear that they are insolvent and because of their balance sheet problems, effectively cease new lending – they effectively become zombie banks.

    That doesn’t apply in to the Australian banks. It makes perfect sense for banks to tighten lending standards as the economy heads into a recession. One would also expect the demand for credit from both firms and households to be slowing at the moment.

    We are a long way from having to take the steps being considered in the US and the UK.

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  4. Moreover, setting up a “good” public bank in direct competition with the private banks would create all sorts of problems.

    Lets say that the public bank set aside the rising probability of default in the current environment, and decided to aggressively expand its balance sheet. The private banks would either have the choice of following – or not and seeing their market share cannibalised by the public bank. Share prices of the banks would collapse under those circumstances and we could end up with an even less stable financial system.

    Having the government take this sort of role should only occur if there are major concerns about the insolvency of the banking system. Even then, it should nationalise all the banks, get rid of their bad loans, recapitalise the institutions, and prepare them for privatisation further down the road.

    Permanent public ownership is a recipe for even further erording competition in the banking system, and leaving open the possibility of introducing a lot of distortions, including whether to operate on commercial criteria or meet political objectives.

    The GFC demonstrates need for sound prudential regulation and supervision – it doesn’t mean that suddenly the public sector is suited to running banks in the long-term.

    If competition is what we are after – I’d rather see the majors be broken up into pieces that were no longer too big to fail.

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