12 December 2019
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As Warwick McKibbin argued — this might not be a great time to get even with our banks. Let’s give ASIC one more chance to play the tough cop on the beat.

Why it might be wise to be nicer to banks

Peter Switzer
26 May 2016

By Peter Switzer

With oil up again overnight, which has helped power Wall Street higher and should help our market again today, let me take the focus off the election and its hip pocket effects to defend our banks!

Like any other Australian, I grew up with the God-given right to bag banks. One of my best jokes when I speak is a great bank-bashing story. However, I can seldom use it, as so many conferences are sponsored by banks.

I once used it at a St. George small business seminar but it was when the bank was running that TV campaign about a BBQ crowd that went silent when someone was asked what he did. He said: “I work for a bank.” But then he said: “But it’s St. George!” And everyone breathed a happy sigh of relief!

That was a great ad but it belies what we seem to think of banks, especially when it’s projected by the media. I think it was the TV show Fast Forward that used to have a comedy skit that portrayed some terrible banking practice and was followed by “Which Bank?”. The answer was “Every bloody bank!”

Okay, that’s our comical ‘get even’ with banks. Labor really wants to seriously get even with a Royal Commission, while Malcolm T wants to beef up ASIC, which is often-accused as being a toothless tiger, so he wants to give them a set of useful chompers to scare the banks into line.

The Royal Commission worries me a little for a number of reasons. One reason was well expressed by ANU economist and former RBA board director, Warwick McKibbin: “If you look at the state of the world economy at the moment, there’s a lot of fragility,” he told The Saturday Paper recently.

“The politics of this is very dangerous in the way in which it could affect people’s confidence. I wouldn’t say you should never have one ever, but I think at this point, it really isn’t the right time. Not now, when the global financial system is on the verge of a major crisis.”

I agree with most of Warwick’s sentiments, though I think he’s major crisis line could be a bit dramatic. While you have to watch banks, right now is not a great time, with stock markets fragile and regulation internationally relatively tough. A lot of overseas banks are said to be safer now, but a few years back they were close to teetering on the edge of disaster. Greece’s debts, the European bank stress tests and the early failure of quantitative easing in the US produced a stressful time for those of us who watch financial system dramas in preference to cop shows on the ABC.

It’s interesting that the side of the press that really wants the blood sport of bashing banks is made up of those more left-leaning types, who are driven by good motives of “these bastards need to be brought to book”. As a more market-concerned economist turned media player, I do think we should try some more ‘fair dinkum’ regulation first before we grill the share price out of the four biggest stocks held in most of our super funds.

This comes as the SMH runs a story that an RBA paper says our major banks get an implicit ‘taxpayer-funded subsidy’ of between $1.9 billion and $3.7 billion because the finance markets have been convinced that the Australian Government would rescue them.

Yep, and it’s true. And this backing not only gives confidence to lenders from overseas, who then charge our banks lower interest rates on money lent, it means we feel more confident when we put our deposits in banks for safekeeping.

Does our subsidy partly get paid back in lower interest rates, peace of mind and a better night’s sleep? Yep.

I know interest rates can be lower and, undoubtedly, banks make great profits at our expense but these profits flow through to share prices and then super fund returns.

The top 10 super funds in this country over the past five years have returned 8.74% to 7.93%. Even over a 10-year period, which would take in the market-crushing GFC, the returns for the best funds were around 6%! And bank profits and share prices are important contributors to those results.

I recall vividly when Wayne Swan did the one big thing that gave him the right to be eventually called the best Treasurer in the world when he backed our banks. I was in Canberra for the weekend and recall saying to my wife that if Swan hadn’t publicly backed the banks, the headlines in newspapers would’ve scared the pants off people out for breakfast that Saturday morning. They wouldn’t have been spending $50 on a meal that could’ve been knocked up for $10 at home — fear of losing a job can do that!

That action and the fact that our big four ‘despised’ banks were in the top 10 banks of the world in 2008, due, in some part, by good controls from APRA and smart RBA decisions, as well as Government strategy, meant that we dodged a recession bullet.

Our unemployment was tipped by many economists to go over 10%, which would’ve meant bankruptcies, family bust ups and higher crime rates. I know people who increased their spending on security services, they were so fearful.

Let’s make sure we have a responsible Minister who links up with ASIC, who rides the hell out of banks behaving badly but who doesn’t get too worked up about our ‘implicit subsidy’ because it’s not real money going from the taxpayer to the banks. Sure, the banks enjoy an advantage and it goes to profits but it shows up in their share price and dividends that then go into super funds.

And they might overcharge us and that’s a real cost but, at the moment worldwide, we’re seeing the birth of new disruptive businesses and practices that are driving prices down for everything from super market goods to cab fares to hotel rooms to milk. This is creating unemployment and very low wage rises, which we now argue are holding back economic recoveries.

Bookkeepers and web designers in Australia are competing with their rivals in India via the Internet so prices and incomes are falling. Businesses and employees are losing pricing power. Who knows where it will end?

It’s great that consumers can buy stuff cheaper but it could all blow up, if a lot of consumers lose their jobs. I’m with the bank bashers in demanding that they treat customers fairly. I worry, however, when we want to screw them too hard because it will be reflected in their profits, their share prices and it will affect their demand for labour.

And as Warwick McKibbin argued — this might not be a great time to get even with our banks, if that’s what you want. Let’s just give ASIC one more chance to play the tough cop on the beat.

By the way, I think the media really helps expose bad banking practices but it seems to be the consumer who doesn’t play ball to ensure better banking behavior. If we left banks when they played up, then they’d be forced to be better corporate citizens.

When I did radio interviews during the GFC, I’d say the market will turn around and head up. I scoffed at the Great Depression doomsday merchants. And in 2009, the market rebounded over 30%.

When asked what I’d invest in, I’d say the banks.

The price of CBA shares went down to the mid-20s. Not long ago, it was about $95, which was a return of 280% (and you’d add seven years of dividends as well).

Then the Government and APRA forced the banks to become less risky, so they raised more capital so the CBA share price is now $78. There’s a price that super funds pay when we regulate and interfere. It can be for good reasons but we have to be careful we don’t go overboard.

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