From Andrew Cornell in the AFR. Really good stuff...
Why another look at banks’ behaviour?
Suddenly a wholesale investigation into the financial system is back on the agenda. Nearly two years since would-be treasurer Joe Hockey first called for a “root and branch” inquiry into competition in financial services, the push has got legs.
This past week, Commonwealth Bank chief executive Ian Narev appeared all but resigned to a new inquiry and promised his bank would contribute wholeheartedly – regardless of which government initiated it.
For the banks, whose consumer polling is as intense as that of the political parties, Hockey’s campaign comes back to the failure of the Coalition to get traction with an apocalypse-now scenario for the carbon tax and other signs of waning in the antipathy to the government.
Hockey has been back out spruiking an inquiry, roping the superannuation system into a nine-point plan first mooted in November 2010, aided by senators Mathias Cormann and Cory Bernardi. The momentum has been strong enough for the Australian Bankers’ Association to seek input into possible terms of reference.
And it has provoked comment from powerful figures in the history of such inquiries, including Professor Ian Harper who was on the committee for the last major investigation, the 1997 Wallis Financial System Inquiry.
A new inquiry, according to Hockey, would build not only on Wallis but also the Campbell inquiry of 1981 which led to the deregulation of the financial system and floating of the dollar under the Hawke/Keating government, and would be focused primarily on competition. (Like many others, he forgets the 1991 Martin inquiry into banking competition which led to little substantial change.)
The original Hockey nine-point plan released in November 2010 was deeply informed by economist and mortgage industry entrepreneur Christopher Joye (who is now also an AFR columnist) but key elements have been superseded while superannuation has been added.
According to one banker, the industry would be foolhardy not to recognise the momentum for an inquiry even if the answer to the question of what it is seeking hasn’t been addressed.
“The single focus needs to be, what are the policy outcomes?” the banker says. “It also needs to be recognised that the terms of Joe’s original nine-point plan have been overtaken in many cases over the last couple of years.”
Harper himself makes no bones of his desire to be part of any inquiry. He says the financial system is an abiding field of interest for him and, while he would not seek to chair an inquiry, the institutional memory he brings from Wallis would be of great value.
“I would be very interested, no doubt,” he says, “but I don’t think the chair should be someone with a financial services background as that would raise issues of vested interest. Keith Campbell was a furniture maker, Stan Wallis in his self-deprecating fashion would refer to himself as a cardboard box maker.”
That would rule out former Commonwealth Bank boss and Future Fund chairman David Murray who, like Harper, was consulted by Hockey on the original inquiry plan and has since joined his voice to those saying it is time. (As has Wallis himself, noting it is now 15 years since he tabled his recommendations at the end of a nine-month inquiry.)
There’s a misconception that the Wallis Inquiry instituted the “four pillars” policy freezing the big four banks as separate institutions.
In fact, the inquiry recommended dismantling what was then six pillars – with the two big life companies AMP and National Mutual also covered – with takeovers falling under normal competition law.
Then treasurer Peter Costello rejected that recommendation but did cut the six to the four banks and significantly this past week, we saw the first annual result of AMP since it acquired the remnants of National Mutual. It is also often wrongly assumed that Wallis paved the way for an assault on the banks’ mortgage business by the likes of Aussie Home Loans, RAMs and Wizard. That assault on the cosy mortgage market came from the emergence of market-based funding for mortgages via securitisation and the combination of the rocket scientists at banks like Macquarie with the marketing smarts of people like John Symond and Mark Bouris (significantly Joye is now a business partner of Bouris in the Yellow Brick Road financial advice business).
Yet the Wallis inquiry recognised in the emergence of these non-bank competitors a major structural shift: the committee strongly believed funding of the Australian economy would inevitably migrate from bank balance sheets to capital markets and it recommended the establishment of a “twin peaks” model of regulation to track this.
The Australian Prudential Regulation Authority would look after the receding deposit-funded bank and mutual sector, while the Australian Securities and Investments Commission would steward the growing market-based funding sector.
Harper readily concedes that is a world view completely upended by the financial crisis.
“The whole Wallis framework was built on the notion that the [capital] markets would subsume the role played by traditional balance sheets [banks, building societies and credit unions],” Harper says. “We set up APRA and ASIC because of that, taking APRA out of the Reserve Bank to allow the central bank to focus on monetary policy. We assumed systemic risk was likely to be at the level of institutions but actually in the crisis, it was in the markets where systemic risk was, it was markets that froze.”
That is a major reason Harper is a big supporter of the push for a “Son of Wallis” inquiry. The world has changed.
Beyond the political imperative for what, to date, has been the Opposition’s only substantial policy relating to financial services, there are substantive matters for Australia in the new financial order.
The most fundamental is how to fund the Australian economy. By dint of its population size and demographics, Australia has long had and will continue to have a need for foreign capital to fund its investment needs – particularly so with the demand for resources investment to be multi-decade, even if it is not a “boom”.
As Harper says, even if the role the Wallis inquiry foresaw for funding through capital markets has changed, it remains that the means of funding Australia’s investment needs is a major issue.
“So, yes, very much, the superannuation system which will become increasingly significant is very much a part of any wholesale consideration of the system,” he says.
Harper sees the superannuation system, which is predicted to more than double to around $3 trillion by 2020, in terms of the role it may play in funding the economy, including what role, if any, it may have in replacing foreign capital markets as a funding source for the Australian banking system.
Happily for Harper, this funding challenge dovetails neatly with recent work he has done for his firm Deloitte Access Economics at the behest of Abacus, the industry body for the mutual deposit-taking sector in Australia, credit unions and building societies, with a focus squarely on how to support a “fifth pillar” of competition.
While the timing of that report, released two weeks ago and also enforcing the call for an inquiry, was particularly happy, it actually came out of a presentation Harper gave more than a year ago and was the result of work undertaken over many months.
CBA’s Narev steered the inquiry rationale deftly towards this issue of funding the Australian economy.
“We see ourselves being in a very competitive market right across the different ranges of business and products that we have,” he said after his bank’s annual profit announcement this past week.
“In terms of the inquiry, there are legitimate questions to be asked about Australia’s future funding model, the role of the banks in that, the role in capital markets etcetera with that. If the view is taken that the best way to address those issues in an expedient way is through an inquiry, we are okay with that. Either way if whichever government happens to be in power at the time chooses to have an inquiry, we will do what we always do, which is take it seriously, send senior representation there and engage very deeply in the issues.”
That is indeed the path the banking industry sees as not only that of least resistance, but also most value. Funding goes to the heart not just of the needs of the big banks but also potential competition. As “Aussie” John Symond has said, governments can’t regulate competition, they can only try to ensure potential competitors have opportunity.
And, as Harper argued for Abacus and many others agree, the financial crisis has closed down the funding avenues for many potential competitors.
What all in the financial sector fret about, however, is that this “Son of Wallis” will be a “Frankenstein’s Daughter”, a pale shadow of the original driven by base political imperatives rather than the genuine issues.
Funding of Australia’s economy is a first order consideration, competition as defined by vested interests may not be.
Superannuation and its role in the economy is extremely important – but not if the inquiry focuses on Coalition obsessions such as the role of industry funds.
Whatever the case, a new financial system inquiry is looking increasingly likely. And, interestingly, with the carbon tax a non-event, the government seemingly to come out looking okay from the reintroduction of offshore processing of asylum seekers and the win against Big Tobacco, some in the banking industry now are wondering whether the government might reverse its position and hold one itself.
