Australia’s major banks have just booked a combined cash profit of $28.6 billion for the financial year ended June.
Yet Fairfax Media reports this morning that Westpac’s CEO Gail Kelly is warning that all Australians and the economy would have to carry the cost of making the financial system more stable.
Of course you can ever increase capital and become ever more safe, but that does come at a cost. The increasing of capital ends up having ultimately having a diminishing return in terms of safety, but the costs are real, capital is not free.
Those costs will flow through to impact the economy more broadly, noticing and noting that banks are strong intermediaries within the Australian economy.
This is clearly a last gasp effort at swaying David Murray and his colleagues on the Financial System Inquiry who seem likely to recommend increases in the major banks’ levels of capital held and a floor in the internal ratings based measure which would mean more capital held against mortgages.
But it is also disingenuous because Westpac reported an increase in its return on equity of 0.48% to 16.41%. That’s in an economy which is slowing and growing less than 3% and has an inflation rate averaging between 2-3%.
But before we accept Kelly’s premise that she and her other major bank CEO colleagues can cost-shift back to customers, the question that needs to be asked of Kelly and her fellow CEOs is simple.
“How do you justify an ROE of 16.41% in the business of banking in a slow-growing economy where the tax payer is effectively back-stopping these returns because of your too-big-too-fail status and still tell Australians they will have to pay for stability?”
It is privatised profits and socialised losses.
It is also exactly why Daivid Murray and his inquiry, not to mention the global banking boffins in Basel, are honing in on the levels of bank capital.
To go one step further.
In his modern day economic classic, Thomas Piketty discusses the impact of capital which accumulates wealth faster than the growth rate of the economy. It, in this case the big banks, builds wealth at an unequal pace to the rest of the community and the result is an ever-increasing and concentrated wealth in the hands of the few.
This is exactly how the banks have managed to own an ever-concentrated percentage of operations within their space and build these vertically integrated production and sales models for funds management and financial planning. The very same production and sales models which then buy shares in the banks, and of course others, on the ASX.
Being the sales force, client and investor all at once. No wonder Murray has the majors’ wealth management businesses in his sights too.
Australia’s major banks are strong. They escaped the GFC largely because of government largesses, RBA rate cuts and China. Had the speed at which the miners cut jobs in 2008 leaked into the broader economy, Australia too might be mopping up the aftermath of a housing collapse.
To pretend that we were anything other than lucky and to tell Australians that we’ll all pay while a 16.4% ROE is seen as a right is simply wrong.
It’s time to call Australia’s senior bankers to account. The economy is not, and should not be, just about the banks.
More capital and leverage ratios are a must to protect the economy from the next GFC.