Heads may roll, but no quick fix for banking behemoths

The big four banks are too big to fail and it seems too big and complex to manage, as shown by the fact that three out of the four have changed management in the last 18 months and overhauled their boards in the process.

ANZ’s David Gonski and Shayne Elliott are the sole exceptions, but the same questions apply and neither will be claiming any plaudits in their survival.

Westpac’s Lindsay Maxsted lost the chance to take the moral high ground last week when he attempted to stand up against the avalanche of public opinion, from Prime Minister Scott Morrison down, to show some accountability at the bank in the wake of the Austrac changes.

There is something a little unAustralian about chopping heads before the charges are proved, but the reality is even if Austrac had negotiated an agreed statement of facts, the writing was on the wall for chief executive Brian Hartzer.

The bank has underperformed the stockmarket by 41 per cent under his reign and the Austrac snafu was the latest in a series highlighted by the royal commission — from stealing money from customers to selling them dud home loans.

There is no easy answer to the problems evident from the big bank oligopoly.

How the questions are answered will clearly have a big impact on managing the economy because even with their pariah status the big banks are the lifeblood of the economy.

ASIC has gone out of its way to make sure it is not blamed for any regulatory overreach hurting the economy, rightly citing ignorance from naysayers from government leaders down.

There is a need for balance with the banks having enjoyed a regulatory bias in favour of prudential support over competition.

Competition will over time help, but we are dealing with the reality that the big four control 80 per cent of home loans, with CBA and Westpac speaking for 52 per cent of the market themselves.

The good news is their control of new loans is lower at around 69 per cent as outsiders edge into the system, led by mortgage brokers who are seen as more palatable than the big banks, even though they are on what the royal commission rightly saw as fundamentally flawed sweetheart commission deals.

Changing bank culture is another step in the right direction, rewarding executives and staff for customer service rather than bank profits. The sight of corporate heads rolling down the street is a somewhat messy but helpful step in the right direction towards good governance.

The big banks account for roughly 20 per cent of the Australian stockmarket and rank among the top six companies on the bourse, but with a combined market value of $377bn are relative minnows compared to US giants like Microsoft at more than $US1 trillion ($1.47 trillion).

So size itself is not necessarily an impediment to management, it’s a question of having the right systems and governance mechanisms in place.

Over time it will be harder to steal from customers because consumer data rights will give customers control of their banking data and the ability to transfer that to another bank or institution.

Once again this takes time to have a competitive impact, but the moves are being made.

This has come not soon enough because the Australian banking sector has prided itself on its ability to avoid the GFC fallout, but this hubris is now being shown out as mistaken arrogance.

The local bank oligopoly is protected by government mandate and sadly the industry believed its own hubris. Now it faces a deluge of regulatory zeal with everyone from Austrac to ASIC, APRA and the ACCC all trying to get their teeth into the game.

Banks may have been market darlings but their time in the sun has long gone.

The regulators too are not free from scrutiny, with neither ASIC nor APRA emerging with reputations intact from the royal commission. Some questions can also be asked of Austrac, such as:

● Was it conducting at least annual audits or tests at the major banks?

● Did it at the very least target reviews of transactions to and from known hotspots for money laundering or other criminal activity?

● Was there any cross-agency collaboration with the Federal Police’s Australian Centre to Counter Child Exploitation? If so why weren’t the risks flagged earlier? If not why not? It’s mandate states it should.

● And does Austrac now have visibility of the position of other major banks and non-banking financial institutions in this space?

The answers start with the fact the banks are the first line of defence and the information behind the charges first came to light when the bank aired its dirty laundry made in its submission to the royal commission. Austrac sees itself as a dual regulator and financial intelligence unit which makes its information available to the police and others, and is involved in about 15 local task forces and 120 international financial crime units.

The bottom line is it is the banks that are responsible for providing the data.

King a market favourite

Acting Westpac chief Peter King just happens to be the market’s overwhelming favourite to be the long-term boss of the bank. He has stated plans to quit, but at 49 years old, just maybe the top job may entice him to stay.

Financial market types tend to like CFOs because they have the most to do with them, and after 26 years at the bank King knows where the bodies are buried, but his internal experience may be seen as a negative.

One internal rival, David Lindberg, is a quality candidate but looks a little like a Brian Hartzer clone, right down to his first job at consultant First Manhattan to his first bank job at the ANZ.

Cultural change is best executed by an outsider but they take time and money to find and it is noteworthy that King is starting on a 22 per cent discount to Harzer’s $2.7m fixed pay.

The terms of his departure are tough for Hartzer who potentially is giving up $16.3m in bonus shares which assumes he would have received the 636,540 options on offer for performance and the 21,000 short-term bonus shares.

Hartzer was the top-ranked bank boss and his $2.7m contractual departure payment is what the average person would earn over 36 years so hold back the tears.

Lindsay Maxsted’s former KPMG comrade Peter Nash is the standout candidate to be the next chair if an insider is chosen.

He is a quality individual with an audit background.

Maxstead has rightly excluded himself from the decisions on the next chief and chair, and yesterday’s response was handled with textbook precision.

The pity being it didn’t come last Thursday when as this column said the writing was on the wall — to all it seems but some corporate insiders hanging onto their chairs.

Suffice to say Westpac is trading cum another rights issue to pay the Austrac penalty.

The focus now lies on the bank’s 40,000 staff, 98 per cent of whom had no role in the bank’s inability to manage its own computer systems or react promptly when the snafus emerged. Bank staff have copped a caning in the last two years and if Westpac is to emerge relatively unscathed it needs their help.