Big four prepare for bank inquiry grilling as Deutsche Bank hits serious strife
Updated
The timing is exquisite.
With another banking crisis brewing, again in Europe, the leaders of our big four banks are steeling themselves for what they hope will be a wet-lettuce-slapping, meaningless bit of theatre in the national capital this week.
But the unfolding drama at Deutsche Bank — one of the world's biggest and most important financial institutions — should serve as a poignant reminder to the inquisitors and those facing the panel of precisely why they are there.
There is a multitude of potentially distracting but hugely entertaining lines of attack — detailed questions around the perennial scandals in dodgy lending, financial advice, superannuation and life insurance.
Ultimately, though, the underlying cause of the problem needs to be addressed.
Exactly when did our financial institutions become a voracious power-hungry oligopoly with a primary focus on sales growth at any cost?
Why is it that the nation's most profitable and powerful industry is the only one that, in a deregulated and open economy, can demand and expect taxpayer protection should its reckless behaviour endanger itself?
And why, after all these scandals and this unique contract with taxpayers, can bankers reward themselves so handsomely?
Banking and finance now dominate the global economy
Australia isn't unique in that regard, apart perhaps from the oligopoly.
Banking has always been the grease that oils the wheels of global commerce.
But it shifted up a notch with financial deregulation during the past 40 years, transforming what once was largely a utility — an interface between borrowers and lenders — into an industry in its own right.
Not just any old industry, banking and finance now dominate the global economy. As we witnessed eight years ago, a banking crisis can bring the world economy to its knees and that's when taxpayers are called upon to ride to the rescue.
Despite their repeated denials, each of our big four banks faced collapse in 2008. Without taxpayer assistance, they would have been unable to refinance their foreign debt when credit markets froze.
Between them, they used the Commonwealth's AAA credit rating to borrow $120 billion for refinancing. Never has an industry been afforded such assistance in one hit.
Our banks are world beaters
Since European settlement, Australia has been a food and resource exporting nation. And while we have just emerged from the biggest resource export boom in mankind, it is neither food nor resources that is our biggest and most profitable industry.
It is banking.
Australian banks have assets of more than $4.1 trillion, compared with the national GDP, which is just over $1.6 trillion.
In the first half of the financial year, our big four banks should deliver combined earnings of about $15 billion.
Last year, if you add in the smaller and regional banks, pre-tax earnings for the full year totalled around $35 billion, making them the sixth-most profitable in the world.
That represents 2.6 per cent of Australia's national output. And on that basis, our banks are world-beaters.
Given none of our banks operates much beyond Auckland, you could argue, as our bank chiefs do, that it is a truly remarkable performance and an indication of the strength of our financial system.
The alternative view is that our banks have become too large and powerful and use that power to gouge fees, thereby acting as a handbrake on the rest of the economy.
Just ask any small business operator, who now are charged a huge premium over the cash rate and well above mortgage rates, even if residential property is used as collateral.
Australian bank earnings are built largely off one industry: housing. Our big four hold 82 per cent of owner occupier mortgages and 85 per cent of investor mortgages.
Such a concentration would be concerning enough, even without the constant reports that Australian housing, particularly the two biggest cities of Sydney and Melbourne, is in dangerous bubble territory.
Compulsory superannuation a huge money-spinner for our banks
To broaden the earnings base, they have launched themselves into insurance and wealth management and are now fighting a pitched battle for a foothold into default superannuation funds, which have been dominated by not-for-profit Industry Funds.
Compulsory superannuation has been a huge money-spinner for our banks. And a recent report by independent group Stockspot gives an indication of just why that might be.
Its annual Fat Cat report found 638 superannuation funds which overcharged and under-delivered. In all, those funds managed $59.4 billion and last year charged around $778 million for the privilege.
The big four banks and AMP were the worst offenders. What a surprise.
When the financial crisis hit eight years ago, our banks lobbied hard for protection. And they got it.
In addition to the taxpayer support, investors were banned from short-selling financial institutions on the stock market, to prevent a run on share prices. Deposit guarantees were broadened and extended.
All that's forgotten now as massive bonus payments have sent bank salaries back into orbit.
There are bonuses for staff diversity. There are even bonuses for customer satisfaction, which seems a little odd given our bankers complain incessantly about Australia's love of bank bashing.
One can only imagine the furious lobbying that took place in Canberra during the federal election when community disdain for banking gathered strength as calls for a royal commission resonated with the electorate. Clearly it was heeded.
Banking remains the riskiest business on the planet
As a result, the bank inquiry this week begins life with a massive credibility problem.
Despite the push in recent years to strengthen the global banking system, with greater capital buffers and emergency funds, banking remains the riskiest business on the planet. They exist solely on trust and if that evaporates, no amount of capital reserves can save them.
One of the world's most important banks, Deutsche Bank, is in serious trouble, even after the US Justice Department on Friday cut its calls for a $US14 billion fine by almost two thirds.
Should it continue to slide, the German Government will be forced to step in and banks globally are likely to experience ructions similar to that which occurred during the Lehman Brothers collapse.
That's when our banks will expect taxpayers to once again ride to the rescue.
Topics: business-economics-and-finance, industry, banking, government-and-politics, australia
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