Running an Australian bank’s not rocket science

It isn’t that difficult to run a bank in Australia and it has never been easier to do than in the past two years, thanks to Covid and the way we reacted to it.

Running a bank in Australia isn’t rocket science says Terry McCrann.

Goodness me, you would think it was at least brain surgery if not rocket science – running a bank in Australia - the way bankers, analysts and journalists go on about deep strategies, three-year plans and whatever else can be gleaned from management brochures and self-improvement tracts.

In fact, it really ain’t that difficult.

All the banks in Australia are essentially building societies.

They borrow money at X and lend the money out at X-plus 2-4 per cent – in the great majority of cases to people buying their homes or investment properties.

Much of the rest is also essentially home loans – they lend to SMEs, secured on the family home or any other property the business owns.

The idea of lending against the business itself is just too – heading towards rocket science – complicated.

Yes, they do ‘other stuff’ at the big end of town. And yes, they do have to generally not ‘stuff up‘.

But in the main, they are only ‘pretending’ to be major international financial players; and thank goodness for that, as we’ve largely avoided both the loss-making Lehmans and the consequent taxpayer-funded bailouts.

And it has never been easier to run a bank in Australia than in the last two years, thanks to Covid and our reactions to it.

All the banks in Australia are essentially building societies, says Terry McCrann.

The Reserve Bank not only gave the banks $188bn of free money (OK, at 0.1 per cent), it mandated they got all the other money they borrow – both from ordinary depositors and the professional market – at or very close to free as well.

Just take the $188bn.

Do you think, do you really thunk, that it was that hard to make a buck, paying all-but zip interest and lending it out at, say, 3 per cent on home loans, at very little risk of loss, raking in $5.5bn-plus a year gross, very gross, thanks to your friendly Reserve banker?

And much the same applied to the much bigger sums borrowed from the poor old depositor at or close to zero; and then lent out the other side, so to speak, at 2-3 per cent or more.

Incidentally, what’s past completely unrecognised is the way the RBA effectively reinstated what I thought had gone out in the 1970s – government setting the rates banks could pay on deposits and what they could charge on loans.

Yes, it wasn’t doing that literally, but that’s been the effect of its zero rate policy: setting a minimum and (the same) maximum deposit rate, and effectively also the variable mortgage rate.

All the banks had to do was slap on the 2-3 per cent margin and shovel it out the door.

So it’s really quite amusing to see people poring over the bank results in search of seismic and seminal differences, drawing also sorts of profound insights and conclusions, when – absent some really cack-handed cock-up – they are all almost exactly the same.

We can conclude that Westpac succeeded in running third in a field of three – the three of the four big banks that balance end-September and so produce March half results.

As I explained last week, the banks – like everyone else - panicked in the early days of Covid and made massive provisions for bad debts that never arrived.

Indeed the exact opposite happened; people went on a home-buying frenzy – even in, maybe especially in, locked-down Victoria.

Not exactly surprising, when they were getting all-but free money; at that 2 per cent interest rate.

Now the banks are writing back those un-needed loss provisions as income.

If we look through the provisions roundabout, we see that ANZ actually lifted its real operating profit 22 per cent, NAB lifted by 6.3 per cent, and now Westpac by 4 per cent.

You might call them Tweddledum and Tweedledee and Tweedledumber.

Originally published as Running an Australian bank’s not rocket science