Yesterday the Commonwealth Bank announced an unaudited quarterly profit of $2.2 billion to go with the more than $14 billion that the majors announced recently in their half-yearly results.
It’s a lot of money that these organisations are making and in the wake of the Government’s user pays approach in the budget, it is worth revisiting the implicit support they receive from depositors’, investors’ and the markets’ belief they have an implied government guarantee.
Recently in one of the best introductions to an article on the usually dry world of banking, Christopher Joye from the AFR wrote that:
We don’t talk honestly enough about banks. Myths, misconceptions and omissions abound to protect those with an interest in promoting the power of the four institutions that control our financial system. It is beyond time investors understood these dysfunctions.
Joye addresses the special position the majors hold in the Australian financial system, noting the fundraising advantage that they hold. Because of their too big to fail status, he says the majors have an unfair funding advantage over their rivals.
He also highlights what might be referred to as the unseemly haste with which senior RBA and Treasury officials have moved from “game-keepers” to “poachers” joining the big banks:
The last two Reserve Bank of Australia governors, Ian Macfarlane and Bernie Fraser, and the last two Treasury secretaries, Ken Henry and Ted Evans, all joined banks’ boards
But his discussion on the banks is important because he addresses the sacred cow of bank capital and bank leverage. Joye asserts that the majors are leveraging more than they say and many accept,
The reason people think banks are “only” leveraged 15 times is because they multiply the value of bank assets by an artificial concept called a “risk-weighting”. The argument, unique to banks, is that you can heroically assume away a certain part of a loan – up to 80 per cent in the case of home loans issued by the majors – because it is not going to ever be subject to loss.
The questions Joye asks are important because the special position that the majors hold and the implicit government guarantee that allows them to earn billions and billions of dollars per quarter comes at no cost to either the banks themselves or their managers who earn millions to run what are essentially government-backed institutions.
I’m with Christopher Joye – it’s time for an adult conversation about Australia’s big 4 majors specifically, but also about the structure of the financial system in general.
This is particularly poignant at the moment as Majors seek to roll back the Future of Financial Advice (reforms) introduced by the previous government and widely supported by the industry and in particular the industry body the Financial Services Council, as being in the best interest of clients.
Indeed at its core the previous Australian government’s reforms to the financial planning industry and the way it receives payment for its advice and commissions from investment management companies was to see the end to conflict of interests that may arise between the advisors income and the most sound advice for the client.
Treasury’s Future of Financial Advice (FOFA) website says that the objectives of FOFA are, “to improve the trust and confidence of Australian retail investors in the financial services sector and improve access to advice.”
The point that Joye has made and one which is important for the Australian community to discuss is whether the banks acting on behalf of themselves and shareholders are acting in the best interests of all Australian and the Australian tax payer from whom they receive their implied guarantee.
Of course that’s part of the remit of the Murray Financial Services Inquiry and I look forward to a full and frank discussion on the topic.
Disclaimer: Greg McKenna is a Member of the Board of Police Bank – a member owned bank
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