Wow, this column by Adam Creighton was brilliant. I wish we saw more journalism of this quality in Australia. It is brave, original, and important. It is the sort of stuff that should win awards. Based on hard analysis, Creighton fingers the annual taxpayer subsidy to the major banks alone at potentially north of $7 billion. The fact is that APRA, the RBA, and Treasury don't have the balls to address this stuff. More worryingly, they seem to be captured by policy-making hubris.
How taxpayers cosset the banks
ADAM CREIGHTON, ECONOMICS CORRESPONDENT
The Australian
June 01, 2012
FOR all his inveterate "quantitative easing", Mervyn King, governor of the Bank of England, is on the money with bank subsidies. His staff estimated this week that British taxpayers provided an annual subsidy worth pound stg. 6 billion ($9.6bn) to pound stg. 100bn to Britain's biggest banks because they were considered too big to fail.
The global financial crisis showed the free market in banking to be a facade. Unlike with other big businesses, governments (read taxpayers) will step in and protect big banks' creditors in a financial crisis, for fear of what may happen if they don't.
Australia's big four banks enjoy equally breathtaking benefits but our authorities are doing nothing to protect Australian taxpayers' exposure.
Don't take my word for it. Standard and Poor's cut the credit rating of Australia's four biggest banks to AA- in December -- they are still among the 14 highest rated banks in the world -- but pointed out they would be rated only A were it not for "a high likelihood of extraordinary government support in a crisis".
Those extra two ratings notches, courtesy of Australia's taxpayers, help ANZ, National Australia Bank, Commonwealth Bank and Westpac borrow much more cheaply than they otherwise would be able to.
UBS analysts estimate the big banks' wholesale borrowings total $906bn, about half in longer-term loans. Their deposits total $1.3 trillion.
Bond trading data shows the big four pay almost half a percentage point less in interest than smaller Australian banks such as Suncorp and Bank of Queensland pay for similar loans.
That could be a conservative gap, as loan data for smaller banks is sparse.
Taking a wider sample of all non-government borrowers shows AA-rated Australian companies have paid, on average across the past year, 80 basis points less than A-rated firms relative to the interest rates at which the Australian government borrows.
All classes of big banks' borrowings are affected by the implicit subsidy but wholesale, especially longer term, loans are affected more because, unlike deposits, they do not enjoy explicit insurance.
Excluding deposits, Australian taxpayers are handing over benefits worth $2.1bn to $7.2bn a year -- up to $763 a taxpayer -- to the big four banks, which is conservative because the Financial Claims Scheme insures deposits up to only $250,000.
Mind you, the banks don't even pay for the explicit insurance, which the Reserve Bank governor said recently was probably worth "a few basis points" of insured deposits, or somewhere around $250 million a year.
Not only is an implicit subsidy immoral -- it's not legislated and most Australians are unaware of it -- it also distorts the Australian economy in manifold insidious ways. Big banks enjoy an unfair competitive advantage over their smaller rivals.
The Reserve Bank noted in March: "Regional banks' net interest margins continue to be lower than those of the major banks, primarily reflecting more expensive deposit and long-term wholesale debt funding costs." This is bizarre given Australia's smaller banks have higher capital ratios than their bigger peers, and suggests the implicit subsidy flows through to chunkier profit margins for the bigger players.
The financial system has become a bloated octopus, with tentacles poisoning far-flung facets of the economy.
Banks are also encouraged to take on more risk, in what is a "pernicious spiral" for the Bank of England: banks become ever larger, in turn boosting the implicit subsidy. And why not? The owners have limited liability, and managers no liability, so do not have to bear the consequences.
Excessive remuneration levels in the upper echelons of banks have helped push house prices in Australia's capitals out of reach for many Australians in jobs that don't enjoy an implicit subsidy. More recently they have corrupted the pay scales of the public service.
Thomas Jefferson famously said banks were more dangerous to their citizens than standing armies. That may be a stretch, but Australia's fortunate escape from a wider-scale financial implosion in 2008 does not mean we will escape in future. Indeed, banks worldwide have grown larger, suggesting the next conflagration will be worse.
