Perhaps it's the lingering Christmas spirit, or the catharsis of one year ending and another beginning, but it is time to defend Australia's banking oligopoly against those wretched allegations it is too profitable.
Take Ireland. Presently, Irish bonds are pricing in a 35 per cent to 40 per cent risk of default. That is, professional investors who trade Ireland's debt reckon there is half a chance the country will simply default on its debt.
The political upshot of austerity measures against the economic reality of a dramatically lower Irish tax base is ominous. Mathematically, it is difficult to see how Ireland can pay its debts - debts amassed by its rampaging banks speculating on the likes of commercial property in the US.
They were national heroes at the time. Before the financial crisis, the Irish banking system was four times the size of Ireland's GDP. Iceland is even more outlandish. Its banks were worth 10 times that nation's economy.
Banks in both countries expanded too belligerently offshore. They took risks, as banks do, and they failed. In the process they wrecked their respective economies.
In Australia, although the magnitude of major bank profits - weighing in at more than $20 billion at the big four bottom line this year - are odious to all except their shareholders and executives, these profits are the best protection against collapse and sovereign failure.
The ANZ, Commonwealth Bank, National Australia and Westpac - the big four - are now among the 12 biggest banks in the world.
Until world governments devise a system for the orderly collapse of institutions deemed "too big to fail", this hyper-profitability may persist. Naturally the banks contend it should persist.
"Moral hazard" - that is, a situation where one party takes the risk and another party bears the responsibility - is less of an issue when you have mega-banks such as in Australia.
One resounding lesson of the financial crisis is that cross-border banking is precarious. It not only creates banks which are too big to fail but countries which actually do fail.
Our banks don't need to rob the government when they enjoy the right to pillage their customers so vigorously. Such is their licence, bequeathed by successive governments which have failed to address the high-fee/low-competition paradigm which led to big four controlling 90 per cent of the mortgage market and so forth.
The value of this licence to pillage is paramount. While the essential nature of moral hazard suggests that companies with a government guarantee will keep on taking risks in the quest for profit growth and personal enrichment until they blow up, hyper-profitable franchises have a safeguard.
Moral hazard is more of a problem for small banks. Concentrated ownership and control increase the risk (Australian banks enjoy a diverse shareholder base). Smaller banks and companies also have more temptation to take unreasonable risk, as do those with little value in their franchise.
Clearly, having a big four franchise is a valuable thing. Australia's banks, then, are too profitable to fail as much as they are too big to fail.
This brings us to the ANZ. One school of thought has it that the big four should stop overcharging customers for higher profits here and chase growth overseas.
Another says the ANZ boss, Mike Smith, has a hide using taxpayer support to pursue his strategy of creating a mega-bank in Asia. This support, in the first place, was designed to protect the Australian banking system, not to assist in offshore forays which increase the risk of default and therefore bailout.
Australian banks have a mixed, mostly unsuccessful history of offshore expansion.
In any case, you can hate moral hazard as much as you like but there is not much to be done about it.
The banks enjoy a "heads we win, tails the government loses" playing field, which is all terribly unfair but in the circumstances the lesser of many evils.
Perversely, although profits are privatised and losses socialised under the present system, the difference with our hyper-profitable banks is that, eventually, should there be a collapse, there would be a long list of investors queueing up to buy a slice of the ANZ or any of the big four ... such is their franchise.
New owners would sprout up everywhere and the taxpayers would be delivered their pound of flesh through privatisation.
In the meantime, while banks are too big to fail they have to be regulated properly until a mechanism is devised for the orderly insolvency of institutions which are too big to fail.
The question for government - and one which will go unanswered for some time - is, who is starting work on a discussion paper to establish a time-frame for a discussion on the matter?
In the longer term, moral hazard is untenable. Not just in banking but in insurance and any other sector. It will mean persisting impunity for excessive risk taking.
The smaller banks in Australia are incidental to this debate for now. It would seem there is little political will to increase competition by issuing more banking licences.
Macquarie Bank, which went out and raised some $17 billion under the government guarantee to go on a spending spree around the world, has smartly managed to cash in on the guarantee. If the ANZ, however, or any of the big trading banks begins to get too big overseas, it will become a headache for Treasury.
Frequently Asked Questions about this Article…
Why are Australia’s big four banks often called “too big to fail”?
The article explains that the ANZ, Commonwealth Bank, NAB and Westpac are so large and profitable that governments would likely step in to prevent collapse. Their combined franchise value, global ranking (among the 12 biggest banks in the world) and hyper‑profitability mean their failure would pose systemic risks — so they’re described as “too big to fail.”
How do big bank profits help protect Australia from a financial collapse or sovereign failure?
According to the article, the big banks’ very large profits (collectively more than $20 billion in the year referenced) act as a buffer against collapse. Those profits strengthen balance sheets and make the banks more resilient, which in turn reduces the risk of a banking crisis that could threaten the wider economy and the government’s finances.
What is “moral hazard” in banking and why is it a concern for everyday investors?
The piece defines moral hazard as a situation where one party takes risks and another bears the cost. For banks, government guarantees can encourage excessive risk‑taking because profits are privatized while losses can be socialized. The article notes this is particularly problematic for smaller banks, though it affects the whole system.
Is the ANZ’s push for overseas growth risky if taxpayers have supported the banking sector?
The article presents two viewpoints: some argue big banks should stop overcharging locally and focus on overseas growth, while others criticise ANZ boss Mike Smith for using taxpayer‑backed support to build a mega‑bank in Asia. It warns that offshore expansion increases default and bailout risk, and that Australia’s banks have a mixed, mostly unsuccessful history overseas.
What role did the government guarantee play in recent bank behaviour?
The article says government guarantees were meant to protect the Australian banking system. Some banks, like Macquarie, raised substantial funds (about $17 billion) under that guarantee and used them for international expansion. Critics argue the guarantee shouldn’t be used to underwrite overseas forays that raise systemic risk.
How concentrated is Australia’s mortgage market and why does that matter for competition?
The article states the big four control about 90% of the mortgage market. That high concentration matters because it reduces competition, helps sustain high fees and large profits, and limits the political appetite for issuing new banking licences that might increase competition.
If a big Australian bank did collapse, what would likely happen to investors and taxpayers?
The article suggests that, perversely, a collapse would attract many investors eager to buy pieces of the franchise, and eventual privatisation could deliver returns to taxpayers. Still, the preferred outcome is strong regulation and a framework for orderly insolvency before a crisis occurs.
What regulation or policy changes does the article say are needed to address “too big to fail” and moral hazard?
The article argues banks must be properly regulated while governments and regulators develop a mechanism for the orderly collapse of institutions deemed too big to fail. It calls for a discussion paper and a time‑frame for such reforms, noting that moral hazard is untenable in the long term across banking and insurance.
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