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