Banks to government: don't mess with us
Australia's big four banking oligopoly has been making not so subtle threats to the government that it should ignore any of the Murray financial system enquiry recommendations that will have negative consequences for them.
Australia's big four banking oligopoly has spent the past couple of days making not so subtle threats to the government that it should ignore any of the Murray financial system enquiry recommendations that will have negative consequences for them, such as being required to hold more capital.
On Friday, ANZ (ASX: ANZ) head honcho Mike Smith suggested it wouldn't be shareholders but borrowers who would suffer, stating that the banks would charge higher interest rates on home and business loans to compensate for any extra capital requirements.
Today, Westpac (ASX: WBC) chief Gail Kelly took a similar line, arguing that we should be 'having [a] discussion' about the negative economic growth effects that result from the banks cutting dividends, increasing variable mortgage rates, cutting deposit rates or all three.
I agree that we should be having a discussion about the benefits and costs of regulation, just not on the 'heads we win, tails the taxpayer loses' terms that the big bank CEOs want.
For instance, due to their ostensibly better risk controls, current capital rules allow the big banks to hold less capital against assets such as home loans compared to smaller banks such as Suncorp (ASX: SUN) or Bendigo and Adelaide Bank (ASX: BEN). This is a direct subsidy to the big banks and their shareholders at the expense of the smaller banks and their shareholders. Any regulatory changes should look at reducing or abolishing this difference, thereby promoting competition and benefitting customers.
Further, the 'four pillars' policy – whereby the big banks are prevented from merging – is an anti-competitive mechanism in that it stops bad management and poor customer service being punished via a takeover by a more efficient bank. Customers suffer from this policy in the form of higher costs and lower quality of banking services.
Finally, regardless of the rhetoric and any changes in regulation that result from the Murray enquiry, I strongly doubt whether 'too big to fail' will be abolished, simply because the big banks are so, well, big. Due to the number of Australians that would be affected by any future banking bust, there will be enormous pressure on the government of the day to bail out any of the big four that get into trouble. The only way to deal with that is to break them up and prevent banks from ever again reaching a certain size. But you can probably guess what the CEOs of the big four think of that!