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The people's bank

Just when we had become used to the Big Four banks having us by the short and curleys, along comes a proposition to create a People’s Bank. In principle, anything that adds competition to banking without being dodgy should be looked at.
Twenty became eight

Let me revisit a threat I made in late 2008 when I was busy defending the mild acts of bastardry that our banks were engaging in in the face of the greatest financial and economic threats of our time. In various interviews for radio and television and for columns such as this one, my view on the banks (for instance, not passing on full interest rate cuts) was to say that given the extraordinary circumstances, we needed to look past our banks behaving badly.

We were lucky that our banks were regarded as some of the best in the world. Before the credit crisis there were 20 AA-rated banks in the world but now we’re down to eight and our big four are in that group. 

The upside

And while this is something we should be proud of on one level, we have to understand that there has been a positive economic pay off from this.

For starters, if our banks were basket cases like those in the UK and the USA, the federal government bail out would have been bigger and the public debt as a percentage of gross domestic product (GDP) would have been heading to a figure a lot bigger than 13.8 per cent of GDP. In the UK and the USA, we’re talking levels between 50 to 80 per cent of GDP and Japan is closing in on 200 per cent!

It also meant that the banks could cut rates easier because the balance sheets were stronger and they could borrow more easily overseas. This has helped fund home-buying and business expansion.

There has, however, been rationing to business and the interest rates charged to business has been too high.

Old threats

Last year, my threat was that when business and banking life approaches normal I would resume my eternal vigilance watching banks, and my willingness to publicly blast them for bad behaviour.

We’re not quite there yet with the next round of US corporate earnings due to be released over coming weeks at a time when some doubts are creeping in about the US economic recovery.

If the company reports are worse than expected and the company outlooks are a tad more negative than many would hope, I would give the banks until Christmas before I cut loose on them.

However, if the results boost confidence and the US stock market heads up and we follow confirming the bull market is here, then I would bring the banks to book.

More competition
And the best way to do that is to give them competition. Six economists have written a letter to Treasurer Wayne Swan saying a People’s Bank should be considered. The Kiwis have the Kiwibank and here we might use Australia Post branches to deposit money and the Future Fund might manage it.
Money attraction

The non-banks such as Challenger, which used to supply a big proportion of loans to the housing market but now can’t get money at a decent interest rate to give the banks a run for their money, want the government to stand behind their borrowings overseas for home loans. These vehicles for raising money are called Residential Mortgage-Backed Securities or RMBS. These can attract money from overseas if the government puts its AAA-rating status behind them.

This too would give the banks some competition and bring rates down and help consumers as well as businesses. It would also help to stem the tide of rising unemployment. 

Times have changed

Right now, the Big Four banks have 92 per cent of the mortgage market, which has gone up from 80 per cent before the credit crunch. They also have around 70 per cent of the savings of Australian households.

The Australian newspaper recently reported that Goldman Sachs JBWere's banking analyst Ben Koo said  the outlook for regional banks was “bleak, because of higher wholesale funding costs and their dependency on international financing markets that were not open for business.”

In the early 1990s it was access to cheap funds using the RMBS method of raising finance that helped the likes of John Symond build Aussie Home Loans that forced the banks to cut interest rates by around two per cent. 

Keep them in check

As the world starts to put the worst of the GFC behind them, the banks will need more than smart alec commentators like me to keep them honest. They will need strong competitors with good access to well-priced funding to ensure bank profits don’t get in the way of fairness to consumer and business customers.

These petitions for a People’s Bank and lending the government’s AAA-rating to non-banks trying to raise funds cannot be ignored. I had the Shadow Treasurer, Joe Hockey on my Sky News Business Channel program this week and he’s putting his considerable weight behind the non-bank’s request for the government to help with their raising of funds.

The Federal Treasurer Wayne Swan better not dismiss this as pie in the sky stuff. If he does, he could be accused of being an accessory before the fact, of aiding and abetting banks behaving badly. 

Published on: Monday, July 13, 2009

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