Bureaucratic banks need big changes, not soft words

Well who would have thought? A massive ex-government utility is complacent, overly complex and bureaucratic.

Well who would have thought? A massive, taxpayer-guaranteed, ex-government utility with at least 500 executives is complacent, overly complex and bureaucratic, and top managers pay themselves huge “bonuses” with little downside risk.

These are the shock findings of the 110-page prudential inquiry into the culture and governance of Commonwealth Bank, released yesterday, with the inquiry prompted in September by allegations the bank turned a blind eye to systematic money-laundering through its “smart” ATMs.

It gets worse. “CBA has not set aside the requisite space, time and permission for quality reflection, introspection and learning,” the report said, suggesting “there is little evidence to suggest that reflection is a skill that is widely valued in practice. In fact, there appears to be a genuine lack of appreciation for its importance”.

Tell me it isn’t true.

As writer Tom Dusevic put it yesterday, “more poetry and long walks would fix CBA says APRA”.

He was a little unfair, though, as the banking regulator unveiled a separate, parallel set of “enforceable undertakings”.

In what will prove a feast for management consultants, CBA will have to draw up a Remedial Action Plan within 60 days, and appoint an “independent reviewer” to check on its progress.

The one potentially substantive change was reminiscent of fictional character Dr Evil’s ludicrous demand for “one million dollars” in the movie Austin Powers: APRA will increase CBA’s minimum capital requirement by $1 billion.

Not only is $1bn not much in the context of CBA’s $64bn in capital, the imposition won’t make much difference given the sizeable buffer above minimum requirements CBA already maintains.

Don’t take my word for it. In what appears to be the trend when APRA “gets tough”, CBA’s share price went up yesterday, suggesting tangible implications for CBA’s business model were slim.

The inquiry’s report and APRA mean well but the problems identified at CBA and more broadly at the financial services sector stem from concrete, structural problems, largely of the government’s making.

Imploring everyone to try harder and be nice isn’t ultimately going to matter if nothing real changes.

It is inevitable institutions like CBA exhibit significant inefficiencies given the diseconomies of scale inherent. It’s inevitable their staff will prioritise narrow financial metrics — which lead to malfeasance or a lack of vigilance — when large chunks of their pay depend on meeting them.

Here are some ideas rather than more waffle about “culture”. Maybe vertical integration should be wound down. Maybe remuneration based around financial metrics at all companies with any sort of financial services licences should be banned.

So-called “at-risk pay” (rarely at risk in practice) has been an elaborate system of rent extraction for senior bank management, distracting them from their actual jobs. Sure, let the private sector run the banks but permitting them to motivate their staff to squeeze as much as they can out of their customers — the productive part of the economy — seems a recipe for periodic royal commissions.