Coronavirus: We’ve just bailed out the banks yet again

Commonwealth Bank of Australia CEO Matt Comyn (fourth from right) alongside Anna Bligh, the CEO of Australian Banking Association (second from right) during a meeting with Australian Federal Treasurer Josh Frydenberg (centre) and other banking executives in Sydney on Wednesday. Picture: AAP

The government and Reserve Bank had little choice but to announce massive and unprecedented stimulus on Thursday. Erring on the side of overreacting to a crisis is safer politically than under-reacting, especially given the enormous uncertainty hanging over the coronavirus impact.

Hot on the heels of the federal government’s $18bn in handouts and tax subsides last week, the RBA cut the cash rate in effect to zero, launched quantitative easing, and offered up $90bn in cheap loans to banks.

The best we can hope for is the package snuffs out any nascent financial instability, given the stampede to sell government bonds already under way globally. The crisis is bad enough in the real economy without it infecting the financial system too.

But it can’t do any more than that. Authorities have ordered swaths of the economy to shut down on the one hand, and they are trying to reverse that decision with the other. No household or business is going to invest or borrow in these circumstances. Credit was already very cheap.

The variables that matter for a rebound in confidence are the infection rate and progress in finding a vaccine for COVID-19.

Longer term, this battery of new interventions, quite aside from the massive increase in debt for the government, erode further the incentives for businesses to have enough cash reserves to get through a crisis.

Whatever vestiges of a free market remained in the financial system have now evaporated. This is, in fact, a pre-emptive bank bailout. The $90bn in cheap loans to banks means they don’t have to worry about defaults.

“You can make high profits for years but at the first sign of trouble, we’ll take all the risk,” the official sector is saying to the financial system.

To give an example, banks will be able to borrow at 0.25 per cent from the RBA and lend to business at more than 5 per cent (the prevailing average small business lending rate). And the public won’t be enjoying the interest margin.

The sudden changes to bank regulation also make a mockery of the tinkering since the global financial crisis. APRA has reversed what was already a timid increase in capital requirements at the first hint of trouble.

As for the painstakingly developed “resolution regime”, whereby banks would be allowed to fail in a controlled way in a crisis; what a waste of thousands of hours of bureaucrats’ work.

For months, the government has stressed the economy’s “resilience”. This crisis proves the opposite. Economies are fragile.

This virus was not a so-called “black swan”, something that couldn’t be imagined occurring. Pandemics have occurred often, with increasing frequency, and as recently as 2009. Yet the latest one has crippled our economy after not yet 10 people have died.

Once we emerge from this, we need to design a financial system — and a health system — able to withstand the next one.