Westpac deputy CEO Phil Coffey delivered a speech on Friday at CEDA in which he gave a spirited defence of the role the major banks play within Australia’s financial system.
The speech, titled “Financial System Inquiry: Funding Australia’s Economic Future”, dealt with the structure of the Australian financial system, the lack of “savings” that exist to fund the economy without recourse to offshore markets because of the tax treatment of shares and the large pool of superannuation savings.
If you strip everything back, what Coffey implicitly asserts is that Australia’s pool of savings is not big enough to “solve for growth” in the Australian economy and that as such, the majors play the role of intermediating funds from offshore back into the system. So we need big strong, profitable domestic banks – the Big Four.
He also says that in a high growth environment, banks would need to push up rates to compete for the domestic pool of savings (something the majors have been doing since 2008).
This is critical to the point he makes about the calls by the Customer Owned Banking Association (COBA) which represents mutual banks, credit unions and building societies that the majors should be taxed because of their too-big-to-fail status is off the mark.
Making a perceived government support explicit by charging a fee would seem to increase the risk of moral hazard. The bank being charged would likely emphasise this aspect as an investment feature. This could have the perverse outcome of diverting funding to the major banks at the expense of smaller banks and non-banks. A rational customer and investor, for example, is likely to direct more of their savings to a guaranteed bank than a non guaranteed financial institution unless there is a material price difference or risk premium.
Whether conveniently or by omission, Coffey forgets to adjust this assertion by both the existence and the the cap on the financial claims scheme which would somewhat negate this impact.
But leaving that aside, it is hard to disagree with Coffey on this point.
Indeed a “fee” or a “tax” on the majors, because they have built solid businesses and balance sheets over many years, would be an economic misallocation of resources of the highest order.
Strong productive economies are not built by dragging down the strong but rather by providing a playing field which gives all players an equal chance at growth.
Equally however, if an organisation is deemed too big to fail – and let’s face it, Westpac almost failed once in my career in markets – then it is prudent that they provide some form of capital in the event that they do fall on hard times.
This is one of the reasons that Globally and Domestically “Systemically Important Banks” are being targeted by regulators the world over – and APRA here in Australia – to hold extra capital over an above what they would have held if they were not too big to fail.
Of course that comes with a cost – but a tax it is not.
Disclaimer: Greg McKenna is a director Of Police Bank, a customer-owned bank and member of COBA. The views expressed are his own.