Using other people’s money
Australia isn’t afraid to put its banks under review, Shamubeel Eaqub notes.
Australian banks are under heavy fire. An Australian Royal Commission that started this week is bound to report widespread issues in banking and recommend a swathe of changes.
We should watch carefully. It is a bit early, but all I want for Christmas is a banking inquiry of our own.
Our largest banks are Australian-owned. Their culture and business practices may not be the same, but are similar.
Australia has kicked off a Royal Commission to investigate poor behaviour by financial institutions, including banks.
Banks in Australia are tarnished. They have been caught rigging interest rates. They have ripped off customers.
One bank allegedly breached anti money laundering and counter terrorism rules over 50,000 times.
Add to that ho-hum service, little innovation and fat profits, and it is easy to see why banks are in the harsh spotlight.
The Royal Commission is given very little time to analyse and recommend changes for a large, complex and economically important sector.
The Australian Prime Minister, an ex-investment banker, and a right-leaning government, did not want a commission. Forced into it, a rushed timeline was the compromise.
One aspect the inquiry will look into is the profitability of banks, which is very healthy in Australian and New Zealand.
International comparisons are annoyingly difficult, because countries follow different regulatory and accounting conventions. The Bank of International Settlements (BIS), described as the bank of central banks, is probably a better source than most.
It compared various profit measures, and Australia’s is higher than comparable jurisdictions like Canada, Sweden, Switzerland and UK.
New Zealand is a little higher than Australia on some profit metrics.
For example, in Australia net interest income was last reported at 1.7 per cent of assets by BIS, and latest data collected by RBNZ suggest in New Zealand it was 1.9 per cent.
Higher profit margins can be related to better products, service and innovation. But it’s not clear that high profits in Australia, or New Zealand, have delivered those things.
Undoubtedly, banking is a critical part of the economy.
In Other People’s Money, British economist John Kay described the importance of banks. They are a payment system, a means of channelling savings to productive investments, an instrument to help manage personal finances across the life cycle and generations, and a marketplace for transferring and managing risk.
On payments systems, New Zealand banks have been slow to invest. Our EFTPOS system was once a world leader.
A Cabinet paper in 2017 summarised that some retailers in New Zealand may be paying twice as much in merchant fees than in Australia.
That’s money that could otherwise have gone towards higher wages for their employees and lower prices for customers.
The Australian payments system has already been through some big changes. The New Zealand payments industry is due to report back to the Government on progress in April.
If tangible progress has not been made, a proper review should take place.
On channelling savings into productive assets, we are doing worse over time.
Each new dollar of debt is more likely to go into buying an existing home than productive assets that will create an ongoing stream of jobs and profits.
It is not clear that the secular increase in borrowing has led to an ever more productive economy.
And when it comes to products to manage savings and risk, New Zealand has limited choice, an immature capital market and it is expensive.
As the Australian Royal Commission gets underway, Australian banks are fretting. They have gotten big, and rely on getting ever bigger to bank juicy profits.
There is little reason to believe that all of the growth in banking over recent decades has been good for society.
We should watch with interest the commision’s verdict. Its report in September will find many faults with the banking sector.
Its recommendations should be the springboard for us to have a focussed inquiry, leading to reforms of our own to a better banking system.