Now that the CEOs of the Big Four banks have been questioned by the Parliament’s Economics Committee it’s time to ask, what now? The Committee is a House of Representatives organ. It’s generally acknowledged that the heavy hitters for this kind of exercise are in the Senate. These mega-salaried CEOs are teflon-coated, obviously well-briefed, and it’s reasonable to wonder whether anything will change as a result of the hearings. Not much, I suspect.
David Gallagher of the Centre for International Finance and Regulation, probably a conservative outfit, says:
The government is using the exercise as a classic case of retail political management, being seen to be keeping our major banks accountable while the Opposition calls for a royal commission into the banking industry.
Gallagher is arguing that the wrong-doings of the banks are not substantial or endemic enough to warrant a royal commission, and that our regulatory system is world-class and fit for purpose. I think he should have been listening to talkback radio over the last few days.
Moreover, a royal commission would undermine confidence in the entire financial system, he says.
This contrasts with the view of Professor Thomas Clarke of the University of Technology, Sydney.
- The banks have experienced continuous systemic risk (partly of their own making), erosion of their integrity, and a loss of public trust.
The Australian banks are on notice that they need to renew their licence to operate, to reconnect with their sense of duty and the Australian people, and to reconfirm their responsibilities to the Australian economy.
This will occur, even if it takes a royal commission to achieve it.
- Every other major industrial country is at an advanced stage in bank reform, and Australia would be isolated if it did not engage in a similar substantial and structural reform process.
He gives a record of the major misdemeanors and inquiries. He clearly thinks a royal commission is warranted in order to restore the confidence that isn’t there.
Still, unless we change government we will not get one. The best we can look forward to is a banking tribunal. The merits of this are considered by Anna Olijnyk, Lecturer at Adelaide Law School, University of Adelaide in a Conversation piece that also has other expert reaction. A tribunal would be more consumer-friendly than the courts, and could award compensation. However, its rulings would be subject to review by the courts. This is similar to how the Human Rights Commission operates in relation to racial discrimination. With respect to 18C only about 5% of cases go on to the courts.
Many of the straightforward cases could be resolved there, so it would have value, but is not an alternative to a royal commission.
One of Labor’s obsessions was whether anyone had been sacked. A bit simplistic, I think, and typical of the limitations of what we saw. Committee members complained of only getting 10-12 minutes each to ask questions. For the CEOs it was a cake walk.
Rodney Maddock of Monash Uni (can’t find the link) says a banking tribunal would end the populist parliamentary circus, which he thinks had some limited value, and would improve over time. He thinks the tribunal could go a long way to restoring trust with the public. The Turnbull government has announced that one will be set up, so we await the fine print.
Meanwhile, I’ll return for a moment to my obsession with false perceptions of bank profitability.
When a company lists on the stock exchange, growth is mandatory to attract investors. Even with a good yield they expect growth to at least keep pace with inflation, to preserve the value of their money.
Banks did quite well after the GFC, but growth started to dry up about two years ago. In terms of earnings per share, which is what counts, from 2011 to 2014 ANZ grew by 25%, CBA by 21% and Westpac by 22.2%. NAB had troubles and shrunk by 12%.
In broker forecasts for the next three year, ANZ are expecting -6.2%, CBA +4.3%, NAB -3.9% and Westpac 0.3%. Investors are comforted by income from dividends ranging from CBA at 5.71% to NAB at 7.06%, but there too the yields are static or going backwards.
Compare this with blood products company CSL, hospital owner Ramsay Health and toll road owner Transurban. Historically CSL grew 64.5% in three years, and looks forward to 66.2%. For Ramsay the figures are 63.1% and 40.4%. Transurban comes in at a whopping 129.8% historically (isn’t privatisation great!) and looks forward to 45.7%. Yields are lower than for the banks, of course.
Unfortunately I suspect bank managements are squeezing everything to try to maintain profits. The customer needs to be seen not as a source of profit, rather as a human being deserving quality service. If banks see customers mainly as a source of profit thewy will lose their profits as well as their licence to operate.
At the same time if shareholders need reasonable rewards, or they will go elsewhere. If they become really unhappy, the bank fails.
Bank CEOs actually have a tough job at present. Lets hope they are up to it, because the Big Four are integral to our economic wellbeing and are actually too big to fail.