The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Friday, May 21, 2010

The growing gulf between regulation in Australia and the UK...

The disconnect between the rhetoric and policy proposals apropos the banking sectors in Australia and the UK mounts by the day. It is quite remarkable given the commonalities shared by the two markets prior to the GFC. There were once few real differences between our majors and the ‘high street’ banks absent relative progress.

The majors were less advanced with product development (eg, high LVR and non-conforming loans) and securitisation, which proved to be a source of strength during the GFC. The more mature UK banking system was really a rather unfortunate and independent casualty of the US sub-prime crisis. In this regard, one of the chief deficiencies of our mother country cousins was their exposures to, and reliance on, overseas markets. I will not bother reiterating how this should be an enduring lesson for the local oligarchs!

The UK's new Coalition Government has just announced that it has set up a commission to look into the merits of splitting banks up into their retail and investment banking arms. That is, they are thinking of embracing the 'narrow banking' proposals that I have discussed at length here.

Yet perhaps the most surprising disjunction is between the two central banks: ie, the RBA and the Bank of England (BoE). In the UK, the BoE is the banking regulator, much like the RBA was prior to the hiving off, and formal establishment of, APRA in the late 1990s following the 1997 Wallis Inquiry's recommendations.

There is an enormous and growing gap between the RBA and BoE's willingness to speak out on financial sector reform in a post-GFC world. The RBA’s output is incredibly sanitised and seems fuelled by the view that Australia's providence in circumventing the worst of the GFC is in large part due to our policymakers' prescience. One rarely if ever sees a controversial word on the subject of banking, or competition for that matter. Indeed, the RBA has bent over backwards during the last 24 months to defend the concentration of Australia's banking market. In the RBA’s narrow lexicon, the state of competition in the banking and finance sectors tends to be judged only by ‘access to finance’. This has been a common refrain that the RBA have used to defend the major bank oligopoly. As I have argued before, this is, however, somewhat asinine: access to finance tells us nothing about the terms, pricing and differentiation of products, which is what competitive pressures really influence.

By way of contrast, the Bank of England—from the Governor down—appears to be on the war-path when it comes to all things related to banks. The Governor, Mervyn King, recently argued that policymakers should consider the narrow banking approach. And yesterday we had one of the independent members of the BoE's Monetary Policy Committee, Adam Posen, advocate the breaking up of the UK bank oligopoly.

Posen's preparedness to speak out, and his expert views, once again demonstrate why the RBA’s non-expert Board only undermines its ability to govern the internal executive, which is its notional reason for being. As I have suggested before, we need more macro specialists appointed to the RBA's Board alongside the one current member, Warwick McKibbin, who is absolutely world-class. Anyways, this is what the BoE's Posen had to say, as reported by one media outlet:

""In the UK we have too few banks, they're too large and this is interfering with the UK's recovery as well as being a destabilising factor," Posen said at a conference on financial market regulation here. An overly concentrated banking system is one that is unstable, Posen reckoned: "It is good to have diversity.""