Competitive advantage forum: RBA slated over rates as big banks sound alarm

Former Treasury secretary Ken Henry has issued an extraordinary attack on the RBA’s framework for setting rates.

 

Former Treasury secretary Ken Henry has issued an extraordinary attack on the Reserve Bank’s framework for setting interest rates, as the nation’s top bankers said a deluge of new regulations and the prospect of a royal commission were throttling their ­ability to remain internationally competitive.

At an exclusive ­summit convened by The Australian in Sydney yesterday, ­Commonwealth Bank chief executive Ian Narev, the chairmen of National Australia Bank and Westpac, and Australian Bankers Association chief Anna Bligh said mounting regulation — which now makes up more than 70 per cent of the NAB board’s agenda — was endangering the stability of Australia’s banking system.

Westpac chairman Lindsay Maxsted said the growing ­possibility of a Labor-backed royal commission, amid the Coalition’s diminished numbers in parliament, was “very dangerous stuff”.

“What messages does that send to the rest of the world who, by the way, think we have got one of the safest and most secure and stable banking systems in the world,” Mr Maxsted said.

In an unusual move, Dr Henry, the NAB chairman, said regulators should have done a better job recently explaining it was their attempts to cool housing markets that forced banks to lift rates on interest-only investor loans.

“I will probably get myself into trouble,” he said. “We do need to have regulators out there explaining why they’re taking the regulatory action they are taking. And they also could do us all a favour … by explaining that they do expect these things to have an impact on borrowing rates.”

He said the ­Reserve Bank’s 20-year-old practice of independently setting the cash rate each month had misled people into thinking the RBA controlled mortgage rates.

“There is a very poor understanding of what affects market interest rates in Australia today,” he said. “The Australian population has become conditioned to the idea that banks should adjust mortgage interest rates only if and when or as the overnight cash rate of the interest is adjusted.”

Dr Henry referred to the public backlash against banks when they lifted rates following the Australian Prudential Regulation Authority’s crackdown on investor lending. “In a mature discussion of these things, the public response would be, ‘Well, we live in a market economy’,” he said. “No. In Australia today, it would be, ‘NAB profiteers at the expense of investors’.” The comments came hours ­before Scott Morrison met the chairmen of three of the Big Four banks one on one, purportedly to discuss how they might avoid the proposed bank inquiry. A series of banking scandals since the financial crisis has undermined banks’ reputations, promp­t­ing a series of pro-competition reforms and calls for a royal commission.

Finance Minister Mathias Cormann, also at the summit, said the push for a royal commission, which has the support of some Nationals senators and MPs, was cynical.

“I don’t believe it is driven by what they consider to be the public interest but about what they perceive to be a political ­opportunity,” he said.

Ms Bligh said banks were facing “the most intense period of ­reform that the banking industry has seen in Australia since its ­inception”. A new banking executive ­accountability regime has given APRA the power to fine executives and amend pay practices it does not like, while the government has tasked the Productivity Commission with investigating competition in the sector.

Mr Narev, who earned $12.3 million last year, said bankers’ pay was affecting public ­respect for banks.

“Within and outside the banking sector, the whole issue of executive remuneration is a legitimate issue of public concern,” he said. “I think we’ve got to understand that there is a perception out there that big ­organisations are run disproportionately for the benefit of the ­executives.”

Dr Henry said bonuses at NAB had been cut 10 per cent for 80 per cent of staff. “Boards do have to be prepared to insist on remuneration outcomes that might at times appear unfair,” he said.

Digital technology and plans for “open banking” — allowing customers to request banks give their data to third-party non-bank competitors — were big threats, the summit was told.

“Banks will be facing disruption from some of the biggest ­global players in the world,” Ms Bligh said. “So we will have big multinational companies coming into Australia, looking at our banking and finance sector.”

Dr Henry added: “The competitive challenge in our industry is not so much that one of us is going to cut the other’s throat … It is that we are going to be ­challenged beyond our ability to cope by the big IT platform ­providers, the Googles and the Apples and so on.”

The banks are also being investigated by the Australian Securities & Investments Commission, which is concerned that the justification or explanation for interest rate hikes is inaccurate or false and misleading.

After APRA launched new ­restrictions on ­interest-only ­lending in March, and told banks to stay “comfortably below” the ­annual 10 per cent cap on growth in property investor loans, the banking sector rammed through a series of interest rate hikes to dampen ­demand for the products.

Dr Henry said the focus on the cash rate alone in financial regulation had been misguided, referring to the Reserve Bank in 1996 agreeing with the government to set the cash rate to keep inflation between 2 and 3 per cent.

“The RBA set off on its independence from government … with just one instrument, the official cash rate ... and not with any of these macro prudential instruments that are now being deployed,’’ he said.