What’s wrong with our lenders? Noth­ing re­ally


Another week, another damn­ing re­port about the banks. If the Queen’s an­nus hor­ri­bilis was 1992, Aus­tralian banks are hav­ing theirs now.

An­nounce­ment of a royal com­mis­sion in De­cem­ber capped an es­ca­lat­ing se­ries of scan­dals span­ning years, in­clud­ing in­ter­est rate rig­ging, mort­gage and in­sur­ance miss-selling and, most re­cently, al­le­ga­tions CBA smart ATMs, for all their so­phis­ti­ca­tion, weren’t smart enough to stop crim­i­nals plough­ing wads of cash through them.

The Pro­duc­tiv­ity Com­mis­sion added to the cho­rus of com­plaint about Aus­tralia’s fi­nan­cial sys­tem this week, declar­ing an in­suf­fi­cient level of com­pe­ti­tion and call­ing for fur­ther re­form.

But for all the oblo­quy hurled at the big four, and the bank­ing in­dus­try in gen­eral, they re­ally aren’t so un­usual. Aus­tralia’s banks aren’t par­tic­u­larly prof­itable or mo­nop­o­lis­tic. They aren’t es­pe­cially bloated or large. To the ex­tent bank­ing poses pol­icy chal­lenges, they aren’t unique to this coun­try.

That, at least, is one con­clu­sion from a ma­jor study out re­leased in Jan­u­ary, us­ing 2016 data, from the Bank for In­ter­na­tional Set­tle­ments, a Switzer­land-based body that rou­tinely analy­ses the world’s fi­nan­cial sys­tem.

The banks’ sup­pos­edly high rates of re­turn on eq­uity have be­come Aus­tralian cor­po­rate folk­lore, but they ac­tu­ally aren’t so un­usual in­ter­na­tion­ally.

Ac­cord­ing to the BIS, banks’ ROE were a lit­tle over 10 per cent in 2016, but Cana­dian, Mex­i­can, Chi­nese and Swedish banks all made greater prof­its as a share of their share­hold­ers’ funds.

Aus­tralians banks’ net in­ter­est mar­gin, the rough dif­fer­ence between what they lend at and bor­row for, on av­er­age — around 2 per cent in 2016 — was thin­ner than those in Mex­ico, the US and Bri­tain.

I’m no ex­pert on Mex­ico, but I’d safely guess their banks aren’t be­ing sub­ject to the same pub­lic bash­ing as ours are.

What about size: aren’t the big four lord­ing it over ev­ery­one else? Turns out no, not re­ally. The as­sets of the three largest banks in Aus­tralia made up 60 per cent of to­tal bank­ing as­sets here in 2016, much less than in The Nether­lands (75 per cent) and about the same as in France, Swe­den and Brazil. Gi­ant banks are sim­ply a main­stay of mod­ern economies.

The as­sets of the whole Aus­tralian bank­ing sys­tem rel­a­tive to the econ­omy, equiv­a­lent to 246 per cent of GDP, were com­pa­ra­ble to those in Ger­many (250 per cent) and Bel­gium (261 per cent). They are far lower than in heav­ily banked France (388 per cent).

In terms of branches Aus­tralian banks don’t stand out ei­ther. Aus­tralia has 23 branches for ev­ery 100,000 peo­ple, which is about the same num­ber as in the US, and about half as many as in Ger­many. Spain has three times as many branches per per­son.

Nor are they in­ter­est­ing in terms of staff: Canada’s banks, which are rou­tinely com­pared to Aus­tralia’s given the eco­nomic sim­i­lar­i­ties, em­ployed 843 peo­ple per 100,000 pop­u­la­tion com­pared with 654 here. Switzer­land and Sin­ga­pore reg­is­tered about 1200 each.

There are a cou­ple of flash­ing red lights, though. Of the 21 bank­ing sys­tems the BIS looked at, Aus­tralia’s had more home mort­gages as a share of bank lend­ing, by value, than any other na­tion ex­cept Bri­tain. So let’s cross our fin­gers no prob­lems emerge in the hous­ing mar­ket.

But even more sur­pris­ingly, our banks had the low­est cap­i­tal ra­tio as a share of risk-weighted as­sets of any coun­try, 9.8 per cent, just be­hind In­dia’s at 10.5 per cent. Swe­den’s ra­tio was more than a fifth, and the US and Bri­tain both had ra­tios of 12.5 and 13.4 per cent, re­spec­tively.

As I’ve ar­gued ad nau­seam for years, “risk-weighted as­sets” is a failed, in­sid­i­ous con­cept use­ful mainly for keep­ing a lot of peo­ple in jobs. But even on an un­weighted ba­sis, one that val­ues as­sets hon­estly, Aus­tralia’s banks don’t look so good in terms of cap­i­tal — they main­tain just 4.9 cents for ev­ery dol­lar of as­sets, which im­plies over­all lever­age of a lit­tle over 20 times.

So what hap­pened to “un­ques­tion­ably strong”? This, the Aus­tralian Pru­den­tial Reg­u­la­tion Au­thor­ity has de­clared, is “mis­sion ac­com­plished” to the in­struc­tion the Ab­bott gov­ern­ment gave the bank­ing reg­u­la­tor in late 2014.

The reg­u­la­tor ar­gues its def­i­ni­tions of cap­i­tal are tougher than those in other coun­tries, although I couldn’t see an as­ter­isk bring­ing that to read­ers’ at­ten­tion in the BIS re­port.

Any­way, none of this is to de­tract from the cen­tral point: Aus­tralia’s banks are un­fairly sin­gled out. If bank­ing has prob­lems they are global, not lo­cal. Scan­dals have plagued other coun­tries’ bank­ing sys­tems as much as ours. In the US it’s hard to pick up the pa­per without read­ing some banker has been fired or fined for ma­nip­u­la­tion or fraud.

In­deed, Aus­tralia’s banks are global role mod­els com­pared to those in Bri­tain and the US.

Aus­tralian’s banks aren’t un­usual be­cause since the late 1980s bank reg­u­la­tion in all ad­vanced coun­tries has fol­lowed the same prin­ci­ples, and fi­nan­cial sys­tems have grown in re­sponse.

The ba­sic fea­tures are very high lever­age for en­ti­ties that have been granted the li­cences to cre­ate loans and de­posits, cou­pled with pro bono gov­ern­ment guar­an­tees for de­posits and im­plicit guar­an­tees banks’ other bor­row­ings. Highly so­phis­ti­cated reg­u­la­tion con­ducted by reg­u­la­tors who tend ul­ti­mately to work for the in­sti­tu­tions they reg­u­late is also a fea­ture.

This has been a pow­er­ful — and lu­cra­tive — com­bi­na­tion, fu­elling a near tripling in size of the fi­nan­cial sec­tor in most coun­tries since the 1970s.

House prices and credit have bal­looned ev­ery­where. The num­ber of gov­ern­ment reg­u­la­tors has grown in tan­dem to the point where banks are, func­tion­ally, ex­ten­sions of the state.

How the bank­ing sys­tem per­forms mat­ters be­cause it is so big. Here, the fi­nan­cial sys­tem (which is a bit larger than the bank­ing sys­tem be­cause of credit unions, build­ing so­ci­eties, etc) is the largest it has ever been as a share of the econ­omy. Al­most 10c in ev­ery dol­lar of spend­ing goes to fi­nan­cial ser­vices — ex­tra­or­di­nary, by any log­i­cal or his­tor­i­cal mea­sure.

The se­ries of in­ves­ti­ga­tions into banks’ “cul­ture” are a silly dis­trac­tion at best — as if the thou­sands of Aus­tralians who work for banks some­how trans­form when they rock up at their desk each day. Peo­ple are by and large the same ev­ery­where, and sim­ply fol­low the fi­nan­cial in­cen­tives laid out be­fore them. If those don’t change, then nei­ther will any­thing else.


Aus­tralia’s banks aren’t par­tic­u­larly prof­itable or mo­nop­o­lis­tic, a BIS study shows

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