Australian banks behaving badly: how it’s all Keating’s fault

Australian banks behaving badly: how it’s all Keating’s fault, by Maurice Newman.

The government capitulated last December and ordered the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, led by High Court judge, Kenneth Hayne. …

A most important conclusion from the commission’s interim report is that lack of competition in the Australian banking sector, together with demanding super fund shareholders, ever in search of higher short-term returns, help explain not only what happened, but why it continued.

The Four Pillars (no major bank mergers) policy and, compulsory superannuation, both introduced in the early 1990s by Labor treasurer Paul Keating, have much to answer for. Keating believed financial stability and retirement security would be better achieved through political direction than through market discipline and voluntary savings. This is now open to question.

For almost 30 years, these policies helped encourage a legislated cartel and more importantly the concentration of risk. It’s not surprising. As senior executives moved freely between members, the regulators and the media, an incestuous, chummy network was established. A culture of greed, collusion and complacency flourished. Systems and practices developed a sameness. The Productivity Commission’s Inquiry into Competition in the Australian Financial System found “a blizzard of barely differentiated products” and “an illusion of choice”.

Likewise with compulsory superannuation. With trillions of dollars invested and members somewhat detached from the management of their savings, funds have become sticky, with competition confined mainly to the margins. …

A clear message from the hearings and Hayne’s interim report is that adding regulations simply leads to diminishing returns. What is required is for the existing law to be amended or properly administered.

As Hayne says: “The conduct regulator, ASIC, rarely went to court to seek public denunciation of, and punishment for, misconduct. … Which means case law is scant or, non-existent. …

Much rests on the banks’ risk-management models. More than 60 per cent of their loan books are in residential property, the most concentrated lending of its type in the world. Norway is second with 40 per cent. Today, more than half Australia’s mortgages are originated through brokers. Hayne says “this has been an important contributor to misconduct”, due to perverse incentives based on value and volume, leading to fraudulent statements of income and living expenses. The reliability of bank stress-testing scenarios should not be assumed nor the potential downside in house prices underestimated. …

Having experienced 27 years of uninterrupted growth, we will see how under-50s managers deal with the unravelling of decades of easygoing practice, which they and colleagues have overseen.