Westpac celebrated its 199th birthday yesterday and prime minister Malcolm Turnbull joined the festivities delivering a speech revealing his own family’s ties with the bank, via its predecessor, the Bank of New South Wales, stretching back to his forebear, John Turnbull, who borrowed £25 from the bank in 1817 to buy 100 acres of land – their 13th property customer.
The prime minister lauded the bank’s good work, saying “Westpac has helped millions of Australians build their dreams of independence. A home for themselves and their families. Small businesses that have provided jobs for millions and grown into big businesses and big enterprise. It’s employed hundreds of thousands of Australians”.
But while he lulled the audience with stories of the Bank of New South Wales and his own long-standing relationship, Turnbull then joined the chorus that has seen the narrative around Australian banking take a sharp turn recently.
The former merchant banker said Westpac’s anniversary was a time for reflection because of the place banks hold in society is “based on trust”.
Turnbull’s change of tack mirrored the fact that after years where discussion on the Big 4 banks has been about profits, margins, and returns on equity, those corporate strengths are now being viewed by many as vulnerabilities – signs of corporate and banking excess.
Regulators, commentators and politicians have all reacted to various banking scandals, ranging from allegations of poor advice, to market manipulation, and less than savoury practices in the insurance divisions. There’s a growing perception that the big banks guaranteed by the Australian taxpayer during the GFC – and since – are favouring themselves above all others in an increasingly aggressive manner.
A day after ASIC announced it is chasing Westpac for ‘market manipulation’ of benchmark interest rates,an allegation Brian Hartzer said the bank would defend, Turnbull took aim at banker conduct and bank culture.
“Banks don’t just operate under a banking licence, they operate under a social licence and that is underwritten by public confidence and trust,” he said.
Highlighting that during the GFC – which he renamed the global banking crisis – Australian banks were underwritten by Australian taxpayers, the prime minister asked a question he believes many Australian’s want an answer to.
“Have our bankers done enough in return for this support? Have they lived up to the standards we expect, not just the laws we enact?” he posited.
Clearly the banking regulator, APRA, and the corporate watchdog, ASIC, are of the view that the answer is no. Both entities, separately but no doubt in concert, have put bank culture at the very heart of their oversight.
In a speech this week APRA chairman Wayne Byers addressed culture directly and said it’s an issue the industry needs to deal with:
It would seem no regulatory speech these days is complete without a few words on the issue of culture. Regulators have variously been accused of being on a culture crusade, and wanting to be the culture police. That’s not the case: indeed, regulators are really keen to see the industry lead the running on this issue. We need the financial sector to take up the challenge to put in place better incentives for prudent behaviour, so as to prevent problems emerging in the first place. That is likely to be far more productive than spending our time removing so-called ‘bad apples’ after the fact.
So while regulators have certainly put culture in the spotlight, it is the industry that needs to do something about it.
Which is a point the prime minister made at Westpac’s party.
“There have been too many troubling incidents over recent times for them simply to be dismissed,”he said.
“The truth is that despite the public support offered at their time of need, our bankers have not always treated their customers as they should. Some, regrettably as we know, have taken advantage of fellow Australians and the savings they’ve spent a lifetime accumulating, seeking only dignity and independence in their retirement.”
Turnbull also targeted the incentive culture within banking in a robust fashion.
Most businesses, and banking is still a business after all, reward their rainmakers – the employees who make the most money – with cash, benefits, and promotion.
When it comes to banking, that’s no longer acceptable, the prime minister said.
“The singular pursuit of an extra dollar of profit at the expense of those values is not simply wrong but it places at risk the whole social licence, the good name and reputation upon which great institutions depend,” he added.
The repeated use of the word “licence” could be key to a deeper meaning the prime minister is trying to convey to bank boards and management.
Banks, building societies and credit unions – the entire finincial system – operates under specific authorisation from APRA to act as “Authorised Deposit-taking Institutions” (ADI). Effectively that’s their licence to operate.
The banking system also enjoys government support through the guarantee on deposits below $250,000. But because they are considered too-big-too-fail, the major banks enjoy the perception of an absolute government guarantee. That increases their attractiveness to customers, foreign investors, and other business partners. It specifically increases their credit rating, which in turn lowers the cost of funds for major banks against competitors.
So perhaps the prime minister is sending the banks a very subtle message they need to lift their game or they’ll be forced to by the government, especially since there’s a growing push for a royal commission into banks and their behaviour on a par with the Coalition’s investigation into the construction industry and union corruption.
Of course APRA this week said it will release its new capital requirements for the big banks and that “it will ultimately be a higher capital requirement than we have now”.
Perhaps just how high might be influenced by how the banks are seen to be improving their current cultural issues.
Disclosure: Greg McKenna is currently a director of a Mutual Bank and has worked at both Westpac and NAB during his career.