The Stokes column in the AFR that incurred Rory Robertson's wroth was spot-on about one issue that I have belaboured here too many times to count: the many implicit and explicit taxpayer guarantees that underwrite our banking system without due recompense.
We have great banks. And our bankers do a generally very good job running their utilities. But let's be clear: Australia's banking system is the most heavily subsidised private industry sector in our economy (measured in absolute dollar terms).
We had a politician ask Glenn Stevens how much the (currently free) taxpayer insurance of bank deposits--called the Financial Claims Scheme--was actually worth in his last parliamentary testimony. Because he'd been told beforehand he'd get this question, Stevo was able to respond that it was valued at around "several basis points." Sound small? Actually, that's around half a billion per annum.
Then you have the extraordinary subsidies--justifiably--delivered to the banks by the RBA's liquidity facilities, which with the new "Committed Liquidity Facility" are formal protections against insolvency. For those at the RBA (and some in the financial markets) who don't understand the difference, under the Corps Act if you don't think you can meet your current liabilities--for whatever reason--you are trading insolvent. The Committed Liquidity Facility is explicitly designed to insure away this risk by providing the banks with a line of credit from the RBA to meet sudden, unanticipated liability demands.
So Stokes was right to highlight the following quotes from the Bank of England's Mervyn King. And, frankly, the RBA has done a pitiful job of publicly identifying all the moral hazards in Australia's banking system. And the failure to do so lies with Glenn Stevens. It's de facto impulse is to defend bank margins, defend bank profits, resist thoughtful bank regulation, carve-out special deals to make it easy for Aussie banks to comply with Basel III (eg, the CLF and getting them exempted from the systematically important institutions' extra capital charges that many other nations advocate), irresponsibly conflating bank liquidity with bank solvency, and, most worryingly, seeking to preserve and protect the current system of insidious implicit guarantees that promote too-big-to-fail behemoths (we have four of the biggest in the world) rather than have them properly recognised and priced. Here is the BoE's King via Stokes:
Kingy reluctantly conceded he’d let the banks get away with murder. They had lent too much but “strikingly, most of that increase in lending wasn’t to families or businesses, but to other parts of the financial system”. “With the benefit of hindsight,” Kingy said in his BBC Today Program Lecture on Radio Four, “we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called ‘light-touch’ regulation hadn't prevented any of this.” So how did it go wrong? “Without a banking system our economy would grind to a halt. Because of that, markets correctly believed that no government could let a bank fail since that would cause immense disruption to the economy. “This meant that large banks in particular benefited from an implicit taxpayer guarantee...For the banks, it was a case of heads I win, tails you – the taxpayer – lose,” Kingy said. [Chris Joye: Sound familiar???] But Kingy touched on how hard it will be to rein in the banks. “Already we see vested interests rise up to defend their bonuses and profits,” he said.
