There is growing interest in the so-called 'People’s Bank', which I discussed in detail in my previous post and doubtless has a lot of superficial appeal given the KiwiBank precedent. In a related article, the Sydney Morning Herald has also covered my KangaSupa proposal, which I note could serve as a synthetic surrogate for a publicly-owned bank (although the two are not mutually exclusive).
While the execution of a People’s Bank via Australia Post could be complex, and should only be pursued subject to satisfying the requisite cost-benefit analysis, I think commentators are sometimes too quick to dismiss the merits of a publicly-owned enterprise on the basis of past mis-steps.
Even with no direct retail presence, which is one of its greatest strengths, Australia Post could easily deliver a low-cost online savings solution throughout Australia as ING Direct has successfully proven (or market ‘AussieBonds’—ie retail investment in AAA-rated government debt). And establishing a simple and low-cost greenfields home lending operation is not especially difficult, as the many new entrants to the mortgage market have demonstrated over the years (eg, Aussie, RAMs, Wizard, Members Equity Bank, etc).
Furthermore, history is littered with countless examples of private banks failing. Indeed, central banks were originally established with the explicit objective of preventing private bank failures, which occur with regular frequency due to the asset-liability mismatch that sits at the heart of their business models (think Northern Rock).
In Australia, Westpac and ANZ both almost came to grief during the last recession, and there is compelling evidence to suggest that some of the smaller banks would have failed had the government not undertaken its multifarious and unprecedented interventions to shore up the system during the GFC.
We also forget that one of our most lionised financial institutions, the Reserve Bank of Australia, which is regarded as one of the best central banks in the world, is a publicly run entity. Indeed, few members of the public understand that one of the primary roles the RBA plays is as a ‘lender of last resort’ to the private banks when it offers cheap sub-market finance during times of extreme adversity (such as the GFC when there were weeks when the RBA was virtually the only institution in the world that would provide the necessary finance to Australian banks due to extreme counterparty risk-aversion).
The current chairman of Westpac, Ted Evans, was a public servant for his entire professional career culminating in his appointment as Secretary of the Commonwealth Treasury. In fact, Gail Kelly’s long-serving predecessor as CEO of Westpac, David Morgan, spent most of his corporate life as a senior Treasury official. Ian MacFarlane, the former governor of the RBA, is one of the key directors at ANZ. And his predecessor, Bernie Fraser, who was also Secretary of the Treasury, is Chairman of Members Equity Bank.
Yet there are also persuasive arguments that the government should do more to support the smaller regional banks, like Bendigo & Adelaide and Bank of Queensland, which are community-orientated enterprises, and other important innovators with public characteristics, such as the super fund-owned Members Equity. With greater assistance these organisations could, in concert with building societies and credit unions, collectively exert strong competitive pressures on the majors.
One would also expect to see the gradual return of non-bank financial institutions as the profitability of mortgage lending rises, and securitisation spreads compress.
There are a host of complex policy considerations here, which I have written about at length in the past and don’t propose to recycle through again here. It suffices for the time being to say that these include, but are not limited to, the long-term regulatory approach to taxpayer guarantees of bank liabilities such as deposits and wholesale debt (i.e., under what circumstances can these guarantees be unfurled again in the future), the new policies that will be needed to mitigate the enormous moral hazard risks that have been triggered since the guarantees were first deployed during the GFC against the explicit recommendations of the 1997 Wallis Inquiry (and APRA’s prudential principles), arguments in favour of so-called ‘narrow banking’, questions around what these publicly-subsidised ‘utilities’ should and should not be able to do (e.g., why should taxpayer-backed banks branch out into risky investment banking and securities trading operations, and should they be allowed to establish full-service banking operations in foreign markets in which they have little expertise and which carry far greater regulatory, political, legal and economic risks), what will the government’s long-term policy approach be to maintaining the liquidity of the securitisation market during times of crisis, and so on.
As I recently argued alongside five other economists, these questions should be comprehensively addressed as part of a public inquiry into the architecture of Australia’s financial system following the many new learnings yielded from the GFC along the lines of Wallis initiative back in 1997, which was, ironically, predicated on the existence of a follow-up inquiry in circa 2010. They are far too important to be left to the less-than-transparent bureaucracy to resolve in its current piecemeal fashion.
