Banking boom takes an easy ride on taxpayer guarantee
One of Australia's big banks threatened to withdraw millions of dollars of advertising from a certain media company earlier this year.
There is nothing new in such tactics. From time to time, corporations flex their financial muscle to muzzle adverse press coverage. In this case, the press held firm. The story in question was in the public interest and the bank in question relented.
The threat is worthy of note now, five years on from the financial crisis, as one of the most profound dilemmas for government in this country, and elsewhere, is the emergence of the super-sized bank. It is at once both a comfort and an omen.
The banking system in Australia is strong, which is a good thing. Stability comes before competition. But there is a quid pro quo. The price of this strength is a menacing oligopoly that now dominates the sharemarket, the housing market and the trillion-dollar superannuation market.
Five years ago, the banks were not explicitly backed by the taxpayer. Now they are, thanks to a range of protections, the greatest of which was revealed this year in the guise of the Reserve Bank's "committed liquidity facility", a $380 billion bailout mechanism.
There is no other business so mollycoddled, so assured of survival, thanks to the taxpayer.
For shareholders, the hegemony of the "four pillars" - Commonwealth Bank, Westpac, ANZ and NAB - has been a boon. CBA shares have risen from $44 to $74 in five years. Its market value now towers at $119 billion. In contrast, in 2008 as the share price of BHP topped $50, the big miner's market cap of $250 billion eclipsed the seven banks listed on the ASX.
St George and BankWest were soon subsumed into the big four and, including dividends, the value of the four has doubled since then.
Imagine what might happen if credit growth ramps up in another housing boom and lending standards are relaxed to supercharge bank profits.
The Bank of International Settlements (BIS) - known as the central bank for central banks - rates Australia's big four as the most profitable in the world.
They make better returns than their peers in every developed country and will have racked up a combined bottom line of more than $26 billion this year.
Moreover, the BIS figures rank the operating costs of Australia's banks as fourth lowest among peers: after Sweden, France and Japan, at 1.19 per cent of assets. Net interest margins are third highest. And this sweet spot is no fluke. BIS ranked Australia's banks the most profitable in the developed world for 2011 and 2012.
Unlike most other super-profitable enterprises however, there is little risk for the banks. Yet this "moral hazard" means the banks can take as much risk as is politically possible. The only penalty for failure is some bad PR.
As far as bankers are concerned, regulatory prosecutions don't happen, let alone investigations. And so the job of the Big Bank chief has become one of diplomacy, managing politicians and other stakeholders, and thanks to an ever powerful lobby, the risk of heavier regulation still seems some way off.
Thomas Jefferson in 1809:
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks ... will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."
We have had the inflation. Then the GFC gave us the deflation. Then the banks doubled in size. Let's hope the next step, homelessness, is a long way off.