Regulation needed to pop the bank profit bubble
JOE Hockey has a valid point in wanting an inquiry into the banking system, write David and Libby Koch.
THERE is a fine line between strong banks and creating a gravy train where they can earn windfall profits at the expense of customers.
That's why we think shadow treasurer Joe Hockey makes a valid point in wanting an inquiry into the banking system to ensure banks aren't gouging customers and taking advantage of their privileged position.
The banks are in a privileged position and it's we taxpayers who have put them there. So it's now time for the banks to repay the favour.
At the height of the global financial crisis we, quite rightly, came to the aid of our financial institutions. The "we" reference means the Federal Government and the Reserve Bank because they work for us and we fund them.
So "we" guaranteed bank deposits and allowed them to use our valuable Triple-A credit rating to reduce their overseas funding costs.
It was the worst financial crisis since the Great Depression, major international banks were going broke and we had to help. We had to make sure our banks stayed strong.
A weak banking sector can destroy an economy. We could not allow that to happen.
As a result, our banks not only survived but prospered.
Yes, bank profits took a hit in the year of the GFC but that was mainly because the banks made huge provisions that many of their customers would fall on tough times and not be able to repay their loans.
That assumption was wrong and simply artificially reduced (and masked) the real profit the banks made. Because of the strength of the Australian economy, Aussie consumers and business customers stuck by the banks and made their loan repayments.
During that period the banks continued to whinge about the high cost of funds from overseas. It was a valid point.
The cost of raising money on overseas money markets (because of higher interest rates) did go up as investors demanded better returns because of the increasing risk of the GFC. But remember we were easing this pain by allowing the banks to trade off our Tripe-A credit rating so they were able to raise money at a lower cost than other overseas banks.
This was the big excuse the banks have used in the past to lift their interest rates higher than what has been passed on by the Reserve Bank.
They've used the hysteria of the GFC and the economic troubles overseas to cry poor.
No more.
It's time for the banks to stop crying poor and repay the generosity of the Australian public or face regulatory scrutiny like what is being proposed by Joe Hockey.
Bank profits are now pretty close to being back to pre-GFC levels. Not many other non-mining related industries have recovered so quickly.
So post-GFC, the banks are just as profitable as ever and they're facing less competition because they've been able to gobble up their competitors.
The reality is the Big Four banks are more powerful than ever and they're still complaining about higher funding costs and a desire to put up interest rates by more than the RBA.
This is despite the recent RBA board minutes making the pointed comment that bank funding costs have almost returned to normal.
That's very polite RBA-speak telling the banks their argument is simply not valid.
As we said at the start, Australia needs strong banks. But the banks are now starting to exploit their privileged position and their customers.
Re-regulation of the banks and their interest rate policies is probably not the answer. That is a dangerous route.
The answer is to lift competition and transparency in the banking industry.
The boss of the Future Fund, David Murray, has suggested that Australia Post be able to provide financial products either internally or as an agent for others. It's a great way to increase competition.
Another strategy could be to change the rules to make it easier for customers to switch banks to chase the best deals elsewhere. I'm not talking about just changing transaction and savings accounts but also loan products.