I wonder if it’s entered the collective heads of those involved in the current furor over banks and interest rates – bankers, government, media – that the present debacle is the direct result of the failure to appropriately redefine the Australian financial system in the post-GFC world? Probably not.
What do I mean? Well, today’s debate is being conducted in the ludicrous context of Australian bank “exceptionalism”. That is, that Australian banks were somehow better and more prudent than their international peers prior to the crisis. This lends the banks an outrageous moral hazard in defense of their margins.
But the truth is far different. I have described many times how, in the post GFC period, banks have been protected from an open examination of their heavy integration with the same unstable capital market structures that bought down banks overseas. The list of publicly unexamined issues is endless: the RBA’s opaque liquidity support; APRA’s hiding the details of which banks owe what money to wholesale markets; the government’s implicit guarantee to wholesale debt that everyone pretends isn’t there; the AOFM’s boundless purchases of RMBS; the ceaseless rhetoric of exceptionalism from both government and industry, and the sweeping aside of Wallis Inquiry rules for the financial system that all of these compromises imply.
The obverse of the bank’s moral hazard is that these many “secret” supports lend the government a sense that it must, indeed has the right, to bash the banks into following RBA rate moves every month.
This is an epic failure of policy process and transparency.
Today we have several more contributions to this unnecessary struggle. First, The Cupboard lines up a conga line of corporate stars to bash up Swan:
Ahead of today’s Reserve Bank board meeting, Future Fund chairman David Murray, a former Commonwealth Bank chief executive, said that if the banks had lower returns the availability of credit would come under strain and this could hit small business the worst.
“Regarding profitability, the banks require a healthy return on equity to service their capital and to keep credit growing with the economy, at the same rate as the potential in the economy,” Mr Murray said.
“Attacking their returns is the same as attacking credit availability, which would be felt most noticeably in the small- to medium-enterprise sector.”
…Mr Murray was joined in his warnings about the challenges confronting the small business sector in tapping affordable finance by Bendigo and Adelaide Bank chairman Robert Johanson, former Reserve Bank board member Donald McGauchie and Wesfarmers managing director Richard Goyder.
Mr McGauchie, the chairman of the Australian Agricultural Company, said the bank-bashing was “appallingly cheap politics” and warned that the “jaw-boning” could distort the market, potentially costing people their businesses and jobs.
“There’s only one thing worse than a profitable bank and that’s an unprofitable bank,” Mr McGauchie said.
“The worst situation we can have here is if the cost of capital is going up; (if) the banks are put under undue political pressure to make decisions about what happens on the housing market they certainly will take the cost out in other areas, whether in the way they charge for services or maybe even put more pressure on small business and farmers and others with their rates. The consequences of that on employment and other things are obvious.”
…Bank of America Merrill Lynch chief economist Saul Eslake said that the banks had previously passed on just 15 basis points to business of the 25-basis-point cut ordered late last year as they instead favoured the politically sensitive mortgage customers, who received the full cut.
The average small business overdraft rate stands at 10.8 per cent.
As I said yesterday, this is true. But it is only half of the story. If the banks hold back rate cuts then their assets will be under pressure and the same credit rationing will result.
On the other hand at the AFR, represented in their chief lobbyist, Stephen Munchenberg, the banks spend their morning scurrying under the skirts of the RBA (something I warned ANZ about some weeks ago):
It is increasingly recognised that because of rising funding costs, the Reserve Bank of Australia cash rate is no longer the only determinant of commercial interest rates, including mortgage rates.
But that doesn’t mean the cash rate is no longer relevant, or that mortgage and business interest rates are other than where broadly the RBA wants them to be.
…Since the 1980s, this influencing task has been undertaken via the RBA’s capacity to set the interest rate paid between banks in the overnight cash market. This small intervention can have a powerful influence on bank funding costs.
For at least a decade up to 2007, the RBA’s cash rate intervention was so influential that whenever the cash rate was moved, banks automatically adjusted their main retail rates by an exact or similar amount.
But this all changed with the global financial crisis, which meant that a reasonable proportion of bank funding costs now move independently of the RBA’s cash rate.
Banks either absorb these higher costs, squeezing their margins, or pass some of it on to customers.
Despite this change, the RBA is still securely in the driver’s seat. This is best illustrated by the fact that during the height of the crisis, when bank funding costs were at their highest, the RBA was still able to get housing mortgage rates down to historic lows. If monetary policy had been broken, that was when it would have been found out. It is still the RBA’s stance on monetary policy that broadly determines mortgage and other interest rates.
So why are the banks seeking to underline their control by structurally shifting away from the RBA? Blather, blah and bluster.
By failing to openly address the flaws in our financial system after the GFC, through a new “Son of Wallis Inquiry” or the like, in which the roles and rules of the RBA, APRA and fiscal policy are determined against an adult decision about what kind of financial system we want in the future, we have condemned ourselves to this monthly public relations battle between unaccountable interests in which all lose out.
Most especially the national interest as the efficacy of all of our institutions is eroded.
