Costello warns on bank fragility
AUSTRALIA must not sacrifice the strength of its banks in the pursuit of better treatment for customers, Future Fund chairman Peter Costello says.
And rising interest rates will have “painful” consequences for the property market and Australia’s highly indebted households, the former federal treasurer says.
Speaking in Melbourne yesterday, Mr Costello linked the pressure on banks to Australia’s “subdued” stock market performance.
The reputation of the major banks was at rock bottom, he said, despite them sailing through the global financial crisis a decade ago.
“None of our banks missed a beat,” he told the Urban Development Institute of Australia national congress.
“This is a statistic which the Americans cannot believe: none of the four major Australian banks made one quarter of loss ever.
“Ten years later, they’re all on the nose.”
Mr Costello said Australian regulators needed to ensure financial institutions were “responsive and accountable”.
“But we don’t want to trade off prudential strength in our desire to get better consumer treatment,” he said.
“It’s a big thing for Australia because our banks are a big part of our stock exchange.
“The Australian stock market has been very subdued and a large part of that is what’s going on in relation to banks.”
A key focus of the banking royal commission’s first public hearing – which started last week and is continuing this week – has been the poor treatment of customers by the major banks.
“I’m not excusing the banks,” Mr Costello said yesterday.
“I think many of them made very serious consumer errors ... but I’ll tell you what’s worse than a very profitable bank – a loss- making bank.
“That is bad. That is a real problem.”
He also warned of the potential painful fallout when interest rates began to rise, noting that at 1.5 per cent, Australia’s cash rate was far below its level of 7.5 per cent a decade ago.
Mr Costello was “amazed” to see politicians wringing their hands about high levels of debt among Australian households, which stands at about 200 per cent of household income.
“Of course they are ( indebted), because we made money so cheap,” he said.
“And we made money cheap because we wanted them to borrow, that was the whole idea … We wanted them to borrow so they’d get the economy moving.
“The problem is now that you’ve borrowed so much, how do you normalise?”
The cash rate “can’t stay at 1.5 per cent forever”, he said.