Banking boom takes an easy ride on taxpayer guarantee
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.
Frequently Asked Questions about this Article…
The article explains that Australian banks are now effectively backed by a range of taxpayer protections — the most prominent being the Reserve Bank's "committed liquidity facility," described as a $380 billion bailout mechanism. For investors this means banks enjoy an added layer of stability that reduces the chance of outright failure, which has helped support bank share prices and shareholder returns.
The "big four" are Commonwealth Bank, Westpac, ANZ and NAB. The article notes they dominate the Australian sharemarket, the housing market and the trillion-dollar superannuation market. Their size and taxpayer-backed protections have delivered strong returns for shareholders—Commonwealth Bank shares rose from $44 to $74 in five years and its market value sits around $119 billion.
Yes. Citing the Bank for International Settlements (BIS), the article says Australia's big four are ranked the most profitable in the developed world. They were expected to post a combined bottom line of more than $26 billion in the referenced year, with low operating costs (about 1.19% of assets) and among the highest net interest margins.
The article describes "moral hazard" as the idea that because banks are heavily protected by taxpayers and regulators, they face little risk of true failure. That reduced downside allows banks to take more political and credit risk, which can boost short-term profits and share prices — but also raises the potential for larger problems if risks unwind.
According to the article, if credit growth accelerates during a new housing boom and lending standards are relaxed, bank profits could be supercharged. While that can be good for shareholders in the near term, it also increases systemic risk — something everyday investors should be mindful of when assessing bank exposure.
The article argues that Australia prioritised stability over competition after the financial crisis, which contributed to a menacing oligopoly of very large banks. Protections and interventions have made these institutions more assured of survival, reducing competitive pressure and concentrating market power in the big four.
The article highlights that banks wield significant influence — one bank even threatened to pull millions in advertising from a media company earlier in the year, though the press held firm. It also notes regulatory prosecutions rarely happen, and that bank chiefs now spend a lot of time managing politicians and stakeholders. Reputation, political scrutiny and potential changes in regulation are ongoing risks for investors.
The article suggests a balanced view: taxpayer guarantees and market dominance have been a boon for shareholders, producing strong returns and high profitability. However, investors should also consider moral hazard, concentration risk, possible future regulatory changes, and the potential for credit cycles (like a housing boom) to amplify both profits and risks.
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