Philosophical Conversations Public Opinion Junk for code
parliament house.gif
Think Tanks
Oz Blogs
Economic Blogs
Foreign Policy Blogs
International Blogs
Media Blogs
South Australian Weblogs
Economic Resources
Environment Links
Political Resources
South Australian Links
"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

Liberals call for a financial inquiry « Previous | |Next »
October 26, 2010

Credit where credit is due.

Joe Hockey is calling for a financial inquiry into our financial system and for banking reform. It's about time we moved away from bashing the banks to policy; moved away from concentrating on the Reserve Bank of Australia to the inherent flaws in the financial system itself. Where is the ALP?

RowsonMfatcats.jpg Martin Rowson

The international context of Hockey's proposal is the high degree of instability of the international financial system and the lack of capacity to both prevent and manage financial crises. There are calls for fundamental reforms in the global financial system, given that the IMF is the principal institution of global economic governance positioned to help deal with the current economic and financial crisis and the Fund’s legitimacy and relevance has been undermined in recent years.

The IMF no longer has a major role to play as a lender, helping to guide the global economy and financial system, and protecting the international financial system.

The global economy and financial system are in the midst of a massive deleveraging process. The increased globalization of the world economy and, more important, of the world financial system in recent decades means that countries can run, but not hide, from this crisis or future crises. European countries are facing sovereign debt crises from bailing their junk financiers.

Secondly, the finance industry has effectively captured our government and its policy prescriptions are consistent: finance unleashed would propel the economy to greater economic growth; and countries need to learn to live within their means after a period of excess—exports must be increased, and imports cut. The global financial crisis indicated that financiers or Wall Street in the case of the U.S. played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse.

The Big banks have only gained political strength after the global financial crisis. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The Obama administration seems helpless, or unwilling, to act against them. As in America, the state's velvet-glove approach with the banks in Australia is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change.

Hockey backed away from any suggestions that the Coalition advocates the re-regulation of interest rates. He says that the big four banks were now too big to be allowed to fail, that the four major banks have largely become the Australian financial system and that the major banks are using their newfound market power to collusively signal pricing intentions. He also argues for greater competition as the smaller banks are are finding it hard to get funding.

His policy suggestions are:

1. Let’s give the ACCC power to investigate collusive price signalling (that is, oligopolistic behaviour), which is exactly what Graeme Samuel has called for;

2. Let’s encourage APRA to investigate whether the major banks are taking on unnecessary risks in the name of trying to maximise short-term returns that conflict with the preferences of those that backstop the system, namely taxpayers;

3. Let’s formally mandate the RBA to publish regular—rather than irregular—reporting on bank net interest margins, returns on equity, and profitability so that we can all determine whether the major banks are extracting monopolistic profits; that is, whether taxpayers are effectively subsidising supernormal returns;

4. Let’s investigate David Murray’s proposal for Aussie Post to make its 3,800 branches available as distribution channels for smaller lenders. To be clear, the Coalition does not endorse Australia Post assuming balance-sheet risk and getting into the banking business itself;

5. Let’s ask the Treasury and the RBA to investigate ways to further improve the liquidity of the residential and commercial mortgage backed securities markets, which are an alternate source of funding for smaller lenders, including consideration of the Coalition proposal to extend the Government’s credit rating to AAA rated commercial paper in those markets to improve liquidity;

6. Let’s explore further simplification of my beloved Financial Services Reform Act, to make the business of actually getting out and doing business easier and simpler;

7. Let’s direct APRA to explore whether the risk-weightings on business loans secured by residential properties are punitive. Many small businesses tell me that they do not receive sufficient financial benefit from pledging their family home to secure their borrowings;

8. Let’s commission a resolution to the debate about whether the banks should be able to issue “covered bonds”, in the same way other jurisdictions allow their banks to, which provides a more affordable line of credit;

9. And let’s wrap up all of this work into a full review of the financial system—a Son of Wallis, or Grandaughter of Campbell, whatever you will.

Hockey advocates stopping collusion and increasing competition in addressing the core question: How to regulate banks that are regarded as too big to fail. Is this the beginning of a critical look at the the cult of finance that has seeped into the culture at large?

We now have a situation in which in our society, which celebrates the idea of making money, it is inferred that the interests of the financial sector are the same as the interests of the country. The implication is that the winners in the financial sector know better what was good for Australia than did the politicians and public servants in Canberra.

It's time to address the power of the banking oligarchy. The major banks draw much of their power from being too big to fail. It's time to break the oligarchy through anti-trust legislation in greater competition. What will the ALP do?

| Posted by Gary Sauer-Thompson at 11:09 AM | | Comments (14)


It is ironic that the ALP, the party of reform, is defending the banks from Hockey's calls for greater regulation and competition on the basis that timorous foreign investors might be scared off by a debate about banking regulation in Australia.

Thus Bill Shorten, the Assistant Treasurer, said in Question Time:

...if overseas lenders lose confidence in the debate in Australia on banking regulation, that can have catastrophic consequences for Australian mortgage holders ... overseas lenders have been particularly sensitive in recent times following the very difficult set of circumstances which many foreign banks have experienced through the global financial crisis... I want to know: what does the opposition have against average mortgage holders that they would jeopardise their interest rates by playing with fire?

That positions the Gillard Government as being anti-reform of the financial industry.


Shorten was responding primarily to Hockey's previous attack of Hockeynomics, which suggested imposing government control of interest rates.

Regarding Hockey's item 2, if Hockey had bothered to read APRA chairman John Laker's speech to the Senate Standing Committee on Economics last week he would know that APRA has already been doing exactly that, and would know what APRA found.

Item 4 is largely irrelevant. The problem for second tier lenders is not lack of distribution channel but lack of securitisation funding.

Item 9 is a good suggestion though. It is probably time there was another comprehensive inquiry.

good points Mike.

The key is Hockey's call for an inquiry into the financial system to end the 4 bank oligopoly by increasing competition.

No doubt the banking cartel will dismiss this as political populism and increase their lobbying efforts to resist any attempt to reduce their power.

Hockey is now saying that there is a "compelling case" to remove the federal government's bank funding guarantee from the big banks but keep it for smaller players.

I find it disturbing to see the Gillard Government standing behind the 4 big banks (the cartel) and resisting a call to an inquiry into banking competition.

What is going on with Labor?

The problem of the market power of the banks in Australia is a genuine one---there is concern about the banks too-big-to-fail power in Treasury, the RBA and the ACCC.

Tony Jones in his Lateline interview with Hockey was only interested in the politics inside the LIberal Party of Hockey's call for the need to improve banking competition.

He simply avoided the policy issues of the power of oligopoly --the substance of the debate and did not explore the options o reduce the market power of the banks. As Milind Sathye points out in Inside Story:

The four major banks – the ANZ, Commonwealth, NAB and Westpac – dominate the banking system. They hold 77 per cent of total banking assets, 82 per cent of deposits, 83 per cent of total loans and 88 per cent of home loans. In June 2010, banking assets in Australia were 215 per cent of the GDP, compared to 115 per cent, 87 per cent and 84 per cent for Britain, Canada and the United States respectively. In other words, Australian banking is significantly concentrated. Only in the Netherlands and Sweden does a greater degree of concentration exist.

Because it limits competition, Australia’s concentrated banking market is at the heart of the issues that have been raised by Joe Hockey.

The Gillard Government, in defending the banks, misrepresents Hockey by saying that he proposing a significant re-regulation of the banking system and goes the logic of a a market economy (economic Hansonism).

The Senate has taken things into its own hands--- it will hold an inquiry into competition within the Australian banking sector and the fees and charges and interest rate margins charged by the big banks.

In the depths of the GFC, the major banks had 75 per cent of mortgage business. In contrast, their second-tier competitors lost over half of their 20 per cent-plus home loan market share.

That is a consequence of the way that the Treasury effectively guaranteed bank deposits during the GFC gave them an enormous advantage.

the fat cats are fat from fee gouging. They make super profits.

The fat cats super profits from a lack of competition funds the banks regional strategy to become growth stocks--eg, The ANZ.

I'm just not over how the ANZ boss looks so much like the subjects of Rowson's cartoon.
"timid" ?

I see that the Commonwealth Bank has called the Treasurer's bluff with its almost doubling the Reserve Bank's interest rate rise. The banks are charging us more because they can get away with it.

Labor looks weak. Hockey has got the jump on Swan. Swan will be all hot air talk and little action. Hockey's criticisms of the banks and his calls for more competition look justified.

Swan is anxious to appear as the guardian of the current system of banking regulation. He will not take on the banking cartel.

The Labor Government has been out-maneuvered by Hockey whilst the banking oligopoly exploits their market dominance with impunity.