NAB should keep Ken Henry and Andrew Thorburn to drive change

They were singled out by Hayne, but no one is better equipped to transform NAB than Ken Henry and Andrew Thorburn.

Two questions are reverberating around Australian business: Should Ken Henry and Andrew Thorburn resign from National Australia Bank? And is the sharemarket right that Kenneth Hayne’s measures are really a big boost to banks, meaning all the rhetoric in parliament about hitting banks is just political waffle. Banks are big winners?

In fact, the two questions are related. The big gap in the royal commission report was that Kenneth Hayne did not understand that it was the “greed” of the institutions that forced the banks into high profit gear. Hayne attacked the symptoms and not the cause.

So yesterday was a day of celebrations, because the institutions reckon it’s “business as usual” — lop off a few directors and managers, wait a while, and then press for even higher profit returns. Those banks that don’t deliver good profits will be punished and the punishment from the institutions will be much greater than anything the regulators will deliver.

A few long lunches will look after the regulators.

“We have won! —Buy! Buy! Buy!”

Clearly, I am deliberately exaggerating the institutional reaction and celebration to emphasise the point that the banking debate in Canberra is about the symptoms, not the cause.

But it is a furious debate and Bill Shorten knows that he has Scott Morrison on the back foot. And Shorten desperately needs to divert attention from the ALP’s retirement and pensioners tax and its negative gearing plan. Accordingly, this is a very dangerous time for Australia, because if the regulators do what Kenneth Hayne and the ALP want them to do, then, while it is an attack on the symptoms, it is a strong attack.

In the process, that will maintain the credit squeeze and lead to a severe Australian downturn.

Politically, the Liberals should accept all the Hayne recommendations, extend the parliament and work with the ALP to pass them. But they know the economic consequences and they are looking for ways to modify them and still hold a May House of Representatives election.

Potentially that’s just another disaster for the Coalition. Banks are seen as bad in the community and in need of punishment and so the community anger against the Coalition will be doubled if there is the slightest weakening in its remedies. Therefore, one way or another, the ALP’s hard line against the banks is going to win.

And the regulators know that their job depends on them being brutal in changing the bank profits culture.

I am always very nervous about calling against the market because usually it is right, even though part of the initial share market reaction rise was caused by short covering. (It’s always good to see the shorters lose).

And just to double up on the dangers of going against the market, the Reserve Bank is on the markets’ side. While the central bank has reduced its growth estimates it is still an economic “bull”. I hope they are right, but I fear they are wrong.

And so, the markets say the institutional formula to regain control over the banks must be implemented, starting with lopping off a few heads. Hayne has put forward the heads of Henry and Thorburn, so that makes it easy. The market says they must go. Significantly, the NAB board did not make a statement standing behind their chairman and CEO. Rather, it left it to the two men to fight the battle. Add the parliamentary pressure and it will take a lot of NAB determination to keep them. It’s an extremely difficult task.

No one bothers about the real facts. It’s the ritual that counts. But I can’t think of two people better equipped to transform the NAB than Ken Henry and Andrew Thorburn. Indeed, they are ahead of some of the other banks. One of the reasons the royal commission did not need to change the small business lending rules (they changed the definition) was that Thorburn and Henry led changes that saw the old horror overdraft agreements with small business made fair. I was impressed.

APRA demanded all major banks to carry out a self-assessment on the changes required. NAB made their assessment public and both the chairman and CEO were deeply involved in the change.

I watched Ken Henry as Secretary of Treasury. He was prickly, but when headed in a direction he got the job done. I have no doubt he and Thorburn will deliver. Hayne picked out Henry because he had fun with the interrogator. You don’t do that if you want to avoid punishment. And Thorburn’s apologies were not as grovelling as his counterparts. In my view, Hayne got it wrong in saying that Henry and Thorburn were not dedicated to change.

But there is a far more serious issue. Hayne very powerfully (and correctly) describes the horrible practices that most of the banks adopted. They acted dishonestly and virtually stole customers’ money. Those actions are likely to result in criminal prosecutions. Those charged will obviously need to step down. And in turn the charges will create great uncertainty in banks which is likely to intensify the credit squeeze — exactly what the market and the Reserve Bank are punting will not happen.

On that issue I simply don’t have the facts to defend or accuse individuals. But it’s possible, although not certain, that a series of bank directors and executives will step down if they are charged. So, my defence of Henry and Thorburn is concentrated solely on their ability to change the bank.

Meanwhile the jubilant institutions can’t wait to return “greed” to the banks. Only very strong chairs —like Ken Henry — will be able to halt it.