Bank risk policy compounds the rate of concern

Productivity Commission chief Michael Brennan, Illustration: Sturt Krygsman

The emerging international bank snafu is caused by bad management and regulatory gaps, but the concerns became evident because of the rapid increases in interest rates. which even more staggeringly have exposed the flaws in banks’ risk policies.

In Australia the RBA has increased rates by 350 basis points since May, the fastest increase since the central bank began targeting inflation in 1993.

Its comrades around the world have done likewise. When rates rise so quickly it causes damage, but many thought it would just mean consumers would slow spending to help pay their bigger mortgage bills.

Few considered the immediate fallout would be a financial crisis triggered by collapsing international banks.

The mortgage cliff in Australia is still coming, as about 800,000 loans change from fixed to variable rates mid-year, causing a huge increase in mortgage payments.

This will slow spending and the economy, but so do international banking collapses.

US and Swiss regulators have acted with commendable haste in trying to shore up Silicon Valley Bank, First Republic, Credit Suisse and whoever falls next.

This is different from 2008, when Lehman Brothers was allowed to collapse because no one wanted to inject money to save it.

When Donald Trump was US president he thought it would be smart to lift the threshold over which traditional bank regulations applied from $US50bn to $US250bn, so SVB snuck underneath the hurdle.

The band aids being applied now don’t touch the causes, which include bad regulation thanks to Trump and incompetent banks who thought it better to raise short-term deposits and lend long term through long-term bonds with no match between assets and liabilities.

It’s way too early to call the crisis over, and this will impact monetary policy here and in the US.

The Federal Reserve board meets next week. Westpac’s Bill Evans figures it will raise short-term rates by 25 basis points because inflation is still real, and the danger of doing nothing because of the bank crisis simply raises the question: what does the Fed know that we don’t know?

History has also shown that adjusting monetary policy to offset uncertainty through bank credit crises results in higher rates for longer.

Market expectations have swung wildly on the Fed.

The RBA has the benefit of three weeks before its next meeting, and all going well by then the decision will be based on data. On the evidence to date it will also raise rates by 25 basis points in early April.

Productive approach

Treasurer Jim Chalmers rightly points to the fact 36 of the 71 Productivity Commission five-year review recommendations involve state administrations, which importantly means he needs to show leadership to get change.

It is not an excuse for mimicking his predecessors in the Morrison government and doing nothing.

PC chief Michael Brennan’s agenda is being boosted by the work of Dan Mulino’s house banking committee which has a timely study under way on competition policy.

This week’s hearings heard from both the PC and the ACCC, led by Gina Cass-Gottlieb.

Brennan wants to change skilled migration policy to make it more flexible around income targets, as opposed to priority skills lists.

His overall agenda is “building an adaptable workforce; harnessing data, digital technology and diffusion; creating a more dynamic and competitive economy; efficiently delivering government services; and securing net zero emissions at least cost”.

Competition policy has to date been a missing element in Chalmers’ to-do list.

He reportedly has work in hand on potential amendments, including introducing unfair trading practices provisions which should please small business as it lowers the threshold to prove unconscionable conduct.

Cass-Gottlieb appears to be painting a small target on merger reform and at yesterday’s Economics Committee she talked up the need for compulsory merger notification without adding the important allied bits like stopping mergers until the ACCC has cleared them.

Separately, in another venue, merger ACCC commissioner Stephen Ridgeway expressed concerns about a second test on market power, which suggests the regulator won’t be pushing for this change, which in turn casts doubt on whether the government will make the change.

Former chief Rod Sims wanted a block on mergers by powerful companies where the deal entrenched their power.

The Sims reforms had two elements: that all mergers over a certain size need to be notified, and what threshold will be used.

He figured this also means there is no avenue to go directly to, and means the ACCC will be the ultimate arbiter at first instance. It also effectively reverses the onus of proof for companies who want to overturn an ACCC ruling by arguing their deal doesn’t substantially lessen competition.

The second element to the Sims plan would to kill the Qantas deal before it surfaced.

The recommendation is that when a company has market power it can’t make an acquisition that entrenches or extends that power.

This is far easier for the ACCC to prove in sectors like airlines and telecoms, because market power is definable and Qantas and Telstra, with about 70 per cent market share, satisfy the test.

But Ridgeway seems to suggest this one will remain on Sims’ wish list, with no evidence yet that Chalmers is in the mood for comprehensive reform.

Next week the ACCC has two key competition decisions that will test its resolve in face of likely court action from the losers.

In the battle against Australia’s overly concentrated industry, actual decisions carry more impact than a reliance on market study-based regulation, which appears to be favoured by the present regime.

Prevention is the best cure

Back in 2019 the ACCC, while letting Qantas buy 20 per cent of Alliance, said it wouldn’t allow it to buy the lot because the deal would give it 90 per cent-plus of the Queensland FIFO market and 60 per cent of the WA market.

Worse, the regional market feeds into the national market, 70 per cent-plus controlled by Qantas.

Fresh from using his market power to jack up prices post-Covid, outgoing Qantas boss Allan Joyce is trying the Alliance deal again four years later, and the ACCC on March 23 is widely expected to reject his plea.

Notably in her chats with Dan Mulino’s house committee on Friday, Cass-Gottlieb made special mention of the airline industry and the need to open up more slots at Sydney Airport to let competitors into the game.

On March 23 we are due to know whether 15 years after blocking Woolworths’ attempt to buy the Karabar IGA supermarket outside Canberra, the new regulator has changed its mind.

In the interim Aldi has opened a dozen stores in Canberra to open competition and an alternative buyer in Eric Koundouris has dropped out of the race, so it wouldn’t be surprising if Woolies got a green light.

The Karabar supermarket is a test case on creeping acquisitions where a dominant firm buys lots of little rivals. The bottom line is dominant companies will have to act more like Bunnings by extending its range to pet food and accessories rather than doing what Woolworths is trying to do and buy the parent company of retailer Petstock.