It was a good run for Australia’s banks, but it appears to be over. For Australians, this is likely to be a good thing.
The country has not experienced two consecutive quarters of economic contraction since 1991. There was only one quarter of decline in output during the financial crisis; the government made things easier for the banks and the country by launching a fiscal stimulus programme in 2008 and, that same year, introducing a guarantee scheme backing deposits and banks’ wholesale funding. Years of steadily rising house prices, a commodity boom in the early years of this decade and the inflow of Chinese investment all contributed to a robust post-crisis revival at the banks.
In banking, more than in any other business, trouble is stored up in the good times and discovered in the bad. Risk tolerance increases; regulators relax. And so it has been in Australia.
In the past year or two the tide has ebbed a bit for the industry. It went out further this week, when prosecutors charged executives of ANZ Bank, Deutsche Bank and Citigroup with engaging in cartel conduct, in connection with the A$2.5bn ($1.9bn) share placement for ANZ, one of Australia’s “big four” lenders. The 2015 placement was prompted by an increase in regulatory capital requirements. Institutional demand was low, and the underwriters were forced to take up almost a third of the shares themselves.
The allegation appears to be that ANZ and the underwriting banks colluded by forming a plan to dispose of the shares without unduly disturbing the share price (the banks deny any wrongdoing).
The cartel charge follows other scandals and inquiries. Commonwealth Bank of Australia this week agreed to pay a A$700m fine to settle claims that it broke anti-money laundering and counter-terrorism laws. A royal commission is looking into a range of unethical bank behaviours, from charging fees without providing services to writing fraudulent loans.
Whatever problems may have been stored up in the bad years were almost certainly made worse by weak competition in the banking market. A longstanding policy of the country’s various banking regulators has been the “four pillars” principle: that none of the big four (ANZ, CBA, Westpac, and National Australia Bank) should be allowed to merge with another.
Pro-competitive in intent, the policy has had some anti-competitive effects. It has not, to start with, prevented the big four from tightening their grip on the market by consolidating smaller competitors over the past decade. The big four have three-quarters of the market in many key products including, crucially, mortgages.
The policy, combined with other prudential rules, helps ensure that the big four have a lower cost of capital than smaller upstarts. The designation of the big four as systematically important banks requires them to hold more capital, but also earns them higher ratings from credit agencies. The big four also enjoy favourable treatment under risk-weighting rules. The result of all this has been an extraordinarily profitable banking industry by international standards.
It is to be hoped that regulatory crackdown and the softness in Australia’s economy — house prices are down a bit — combine to force change at the big four. Excess profits at banks impose a cost on the economy, and further delays to reform will mean that the required fixes will have to be made during a crisis, as opposed to a slowdown. Australia managed to secure financial stability in the crisis, but at a cost to competition and therefore consumers. Time to right the balance.
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