tag:theconversation.com,2011:/ca/topics/nab-2250/articlesNAB – The Conversation2023-09-05T05:12:29Ztag:theconversation.com,2011:article/2127802023-09-05T05:12:29Z2023-09-05T05:12:29ZWhat’s to stop Philip Lowe moving to a private bank after he leaves the RBA? It’s what his predecessors did<p>Surely Reserve Bank Governor Philip Lowe won’t move to a private bank after his term as governor ends next week.</p>
<p>After having chaired his last <a href="https://www.rba.gov.au/">board meeting</a> on Tuesday, there’s nothing to stop him, and – as shabby as it seems – he wouldn’t be the first.</p>
<p>There are three reasons why he shouldn’t join the board of or become chair of a private bank, all alluded to in the <a href="https://www.apsc.gov.au/publication/aps-values-and-code-conduct-practice/section-5-conflict-interest">public service code of conduct</a>.</p>
<p>One is concern that the former employee would reveal confidential Commonwealth information (which would be unlikely for someone as cluey as Lowe) or “provide other information that would give the new employer an advantage in its business dealings”, which would be more likely, even if unintentional.</p>
<p>Banks don’t seek out former Reserve Bank chiefs unless they think there’s something in it for them.</p>
<p>Another concern set out in the code of conduct is that the former employee would exploit their knowledge of the Commonwealth to lobby, or otherwise seek advantage for their new employer in dealing with the Commonwealth.</p>
<p>Banks such as Westpac, NAB, the ANZ and Macquarie Bank deal with the Reserve Bank all the time. It runs the payments system, it is responsible for the financial system, and it sets interest rates.</p>
<p>Every one of the four banks I just mentioned has employed either a former Reserve Bank Governor or Treasury Secretary.</p>
<h2>Perceptions matter when a Governor moves on</h2>
<p>Even where these high-profile hires don’t help the banks in their relations with the regulator, the public service code of conduct points to the “perception” that they will have a greater ability to influence regulators than other hires.</p>
<p>The third concern identified in the code of conduct – in my view the most important – has been labelled “<a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-8500.12466">ingratiation</a>” by a public service specialist at the Australian National University, Richard Mulligan. </p>
<p>It’s the possibility that <em>while still in the public service</em>, the employee will use their position to go soft on an organisation (or type of organisation) they see as a potential future employer.</p>
<p>The Reserve Bank’s own <a href="https://www.rba.gov.au/about-rba/our-policies/code-conduct-rba-staff.html">code of conduct</a> is silent on the question of taking up employment with the banks it regulates, although it does say that where there is a perception of conflict of interest, the employee has to discuss it with the relevant department head or governor.</p>
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<a href="https://theconversation.com/the-rba-has-kept-interest-rates-on-hold-itll-be-cautious-from-here-on-208917">The RBA has kept interest rates on hold. It'll be cautious from here on</a>
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<p>The government’s <a href="https://www.ag.gov.au/integrity/publications/lobbying-code-conduct">lobbying code of conduct</a> in place since 2008 purports to ban heads of department from engaging in lobbying activities relating to any matter with which they have had official dealings for 12 months after they have left office.</p>
<p>But former governors needn’t lobby, and 12 months isn’t long to wait.</p>
<p>Philip Lowe’s predecessor, the man to whom he was deputy, <a href="https://www.macquarie.com/au/en/about/news/2021/glenn-stevens-appointed-next-chair-of-macquarie-group-and-macquarie-bank-following-peter-warne-retirement,-diane-grady-announces-her-intention-to-retire.html">Glenn Stevens</a>, finished up as Reserve Bank Governor in September 2016 and joined the board of the Macquarie Bank and Macquarie Group in December 2017. He has been chair of Macquarie Bank and Macquarie Group since 2022.</p>
<p>Stevens’ predecessor as governor, <a href="https://www.anz.com/content/dam/anzcom/shareholder/2007-Annual-Report.pdf">Ian Macfarlane</a>, finished as head of the Reserve Bank in September 2006 and joined the board of the ANZ bank in February 2007.</p>
<p>The governor he replaced, <a href="https://www.anz.com/content/dam/anzcom/shareholder/2007-Annual-Report.pdf">Bernie Fraser</a>, finished at the Reserve Bank in September 1996 and joined the board of the industry funds that became Australian Super in the same year, becoming chair of the super-fund-owned <a href="https://www.industrymoves.com/moves/fraser-steps-down-as-me-bank-chair">ME Bank</a> in 2000.</p>
<p><a href="https://web.archive.org/web/20151103062911/https://www.nab.com.au/about-us/our-business-at-a-glance/board-of-directors/kenneth-r-henry-ac">Ken Henry</a> stepped down as head of the Australian Treasury (and a member of the Reserve Bank board) in April 2011 and in November that year joined the board of the National Australia Bank. In 2015 he was made its chair.</p>
<p>The man Henry replaced at the Treasury, <a href="https://www.moneymanagement.com.au/news/financial-planning/westpacs-evans-retire">Ted Evans</a>, stepped down in April 2001 and joined the board of Westpac that year, becoming its chair in 2007.</p>
<p>I’ve dealt with each of these people while they were governors or treasury secretaries and I’ve never seen anything that made me doubt their integrity.</p>
<p>And yet in my view, none of them should have gone on to work for the type of organisations they used to regulate.</p>
<p>All of them were paid extraordinarily well. In 2021–22 Philip Lowe was on a package of <a href="https://www.rba.gov.au/publications/annual-reports/rba/2022/pdf/our-people.pdf">$1.037 million</a> including superannuation and a salary of $890,252.</p>
<p>None needed another high-paying job straight away, and (because of public service super) all had a generous income to look forward to in retirement.</p>
<p>I understand their need to continue to do interesting things, but I don’t think it’s too big a sacrifice to ask former regulators to do those things away from the types of organisations they had the privilege of regulating.</p>
<p>On retiring from the Reserve Bank in 1968, its first governor <a href="https://www.science.org.au/fellowship/fellows/biographical-memoirs/herbert-cole-coombs-1906-1997#anu">HC Coombs</a>, chaired the Council for the Arts and the Council for Aboriginal Affairs. He made an ever-greater contribution to Australia without doing what the Japanese call <a href="https://www.investopedia.com/terms/a/amakudari.asp">amakudari</a>, or “descending from heaven” to work for the organisations he once regulated. </p>
<p>A profile of the practice includes the admonition “<a href="https://thediplomat.com/2011/05/the-problem-with-amakudari/">don’t snicker</a>”.</p>
<p>When Lowe took the governor’s job in 2016 I wrote a <a href="https://www.smh.com.au/business/the-economy/meet-guy-debelle-and-philip-lowe-the-odd-couple-wholl-be-running-the-reserve-bank-20160916-grho4t.html">profile of him</a> for The Age and the Sydney Morning Herald, speaking to former teachers and colleagues off the record. Repeatedly, unprompted, they mentioned his moral compass.</p>
<p>Lowe is about to turn 62. He has years of useful work ahead of him. I don’t expect him to descend from heaven to do it.</p><img src="https://counter.theconversation.com/content/212780/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Former Reserve Bank and Treasury chiefs have gone on to run Westpac, the National Australia Bank, the ANZ, and Macquarie Bank. It makes regulating those banks hard.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1114172019-02-08T01:30:39Z2019-02-08T01:30:39ZVIDEO: Michelle Grattan on the backlash to the banking report and the medical transfer bill<figure>
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<p>University of Canberra Vice-Chancellor Deep Saini speaks with Michelle Grattan about the week in politics. They discuss the political implications of the royal commission report into banking, and the suspense as parliament returns around the refugee medical transfer legislation.</p><img src="https://counter.theconversation.com/content/111417/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan owns shares in banks and other financial institutions</span></em></p>Deep Saini speaks with Michelle Grattan about the week in politics.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1030892018-09-19T05:02:27Z2018-09-19T05:02:27ZFees for no service: how ASIC is trying to make corporate misconduct hurt<p>On September 6, 2018, the Australian Securities and Investments Commission <a href="https://asic.gov.au/about-asic/media-centre/find-a-media-release/2018-releases/18-259mr-fees-for-no-service-asic-commences-federal-court-action-against-nab-companies/">launched proceedings</a> against two arms of the National Australia Bank alleging a widespread and long standing practice of charging fees for no service. </p>
<p>An intriguing aspect of the action is that the claim acknowledges that the two firms have already agreed to pay back around A$87 million to the affected customers. So ASIC isn’t seeking compensation. </p>
<p>Instead, it wants declarations that the NAB subsidiaries breached the law and engaged in “misleading or deceptive” conduct under the ASIC Act and “false or misleading” conduct under the Corporations Act.</p>
<h2>More than compensation</h2>
<p>It is seeking penalties in respect of those breaches.</p>
<p>Declarations and penalties are important because they can inflict reputational damage.</p>
<p>This can send a powerful message to the rest of corporate Australia about the need to observe and respect the law, something that appears to have been missing in the financial sector to date. </p>
<p>Also, the greater the penalties imposed, the less financially attractive the behaviour becomes to other corporations, who, after all, are chiefly motivated by profit.</p>
<h2>Penalties are typically low</h2>
<p>However, to date it is arguable that the level of penalties sought by ASIC and imposed by the courts have been too low to act as an effective deterrent. </p>
<p>ASIC’s latest claim is a significant step forward.</p>
<p>It is seeking penalties that are likely to hurt, and as a result more likely to make a difference to corporate behaviour. </p>
<p>Its <a href="https://download.asic.gov.au/media/4861334/20180906-sealed-concise-statement-nulis-nominees-australia-limited.pdf">Concise Statement of Claim</a> points to the purpose of its legislation which is to protect consumers and promote fair and efficient market economies.</p>
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<a href="https://theconversation.com/how-courts-and-costs-are-undermining-asic-and-the-acccs-efforts-to-police-misbehaving-banks-and-businesses-95528">How courts and costs are undermining ASIC and the ACCC's efforts to police misbehaving banks and businesses</a>
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<p>In essence, it is asking the Federal Court to make orders directed at changing corporate practices that undermine that purpose. </p>
<p>Its challenge will be to persuade the court to take seriously the need for deterrence and for punitive penalties in addition to compensation. </p>
<p>Interestingly, it isn’t alleging that the NAB subsidiaries made misrepresentations dishonestly, knowingly or recklessly. Its focus is on “misleading” rather than “deceptive” conduct.</p>
<h2>Dishonesty is hard to prove</h2>
<p>This is likely to be because personal dishonesty is notoriously difficult to prove against corporations, whose human agents (employees, managers and the like) are often engaged in independent activities and are not be able to “connect the dots” about broader corporate dishonesty. </p>
<p>It might be time for the law to move away from questions of personal dishonesty and instead look at the objective nature of corporate behaviour. Longstanding practices and systems that are designed to and are inherently likely to mislead fall below the standards Australians expect, whether or not any of the individuals involved act dishonestly.</p>
<p>The case against the subsidiaries of NAB might provide the perfect opportunity for ASIC and the courts to take an important step in the right direction.</p><img src="https://counter.theconversation.com/content/103089/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elise Bant receives funding from the Australian Research Council to conduct research with Associate Professor Jeannie Paterson (University of Melbourne) into the regulation of misleading conduct at common law, in equity and under statute.</span></em></p>If ASIC succeeds in its action against two subsidiaries of the National Australia Bank, the rest of the industry will be put on notice.Elise Bant, Professor of Law, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/880722018-08-23T01:55:27Z2018-08-23T01:55:27ZCompanies keep slashing jobs, but new technologies won’t replace good management<p>As technology improves, it’s tempting for company executives to <a href="http://www.abc.net.au/news/2018-08-22/telco-wrap-nbn-new-ceo-tpg-vodafone-talks-optus-cuts-jobs/10151410?section=business">slash jobs</a> that are “standard” and “routine”, <a href="https://www.pc.gov.au/research/completed/digital-disruption/digital-disruption-research-paper.pdf">making them easy to automate</a>. But research shows focusing on improving management practices will do more to improve companies’ bottom lines.</p>
<p>In a <a href="https://www.nber.org/papers/w23300">study</a> of 32,000 manufacturing firms, American researchers showed firms using certain management practices had 20% better productivity than firms that neglected to use them. </p>
<p>At the same time, integrating technology into business practices was found to only improve firm productivity by 10%. </p>
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<a href="https://theconversation.com/why-coaching-not-gadgets-is-key-to-getting-the-most-out-of-employees-87769">Why coaching, not gadgets, is key to getting the most out of employees</a>
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<p>The firms <a href="https://www.nber.org/papers/w23300">studied</a> varied widely in how much they used structured management practices - targets, performance monitoring and incentives. Targets and monitoring make it clear what <a href="http://www.jstor.org/stable/pdf/977173.pdf">employees need to do and whether they are doing it</a>. The right incentives give them a reason to make the necessary effort.</p>
<p>This suggests organisations such as <a href="http://www.abc.net.au/news/2018-08-22/telco-wrap-nbn-new-ceo-tpg-vodafone-talks-optus-cuts-jobs/10151410?section=business">Optus</a>, <a href="http://www.abc.net.au/news/2017-06-14/telstra-confirms-1400-jobs-axed-in-australia/8617074">Telstra</a>, the <a href="https://www.businessinsider.com.au/the-big-banks-have-cut-4200-jobs-in-12-months-2016-5">big four banks</a>, <a href="https://cpsu-csiro.org.au/2017/09/15/job-cuts-set-to-rock-csiro-minerals-and-data-research/">CSIRO</a> and the <a href="http://about.abc.net.au/our-abc-our-future/">ABC</a>, who have all cut jobs citing the possibility of new technology, may be pursuing the least effective option. </p>
<h2>What’s good management in practice?</h2>
<p>To avoid over-relying on technology while keeping up with change, managers must have the <a href="https://iedunote.com/management-science-art">creativity and persuasiveness of an artist as well as the objectivity of a scientist</a>. </p>
<p>While standard, routine problems can be automated, others require managers to invent a range of options, choose among these alternatives, and then persuade other people to follow that choice. </p>
<p>In “<a href="http://classics.mit.edu/Aristotle/rhetoric.1.i.html">The Art of Rhetoric</a>” Aristotle described the skills necessary:</p>
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<li><em>ethos</em>: an understanding of human character and goodness. To change a situation, managers need credibility and authenticity</li>
<li> <em>logos</em>: the capacity to reason logically. Managers must put forward a rigorous case for converting a firm’s problems into ideas, then options, then actions</li>
<li> <em>pathos</em>: the ability to understand emotions. To persuade people, especially in large numbers, managers must understand their audience.</li>
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<p>Managers shedding staff in the interests of organisational survival face a severe test of all three persuasion skills. In terms of <em>ethos</em> (credibility and authenticity), managers need to admit they cannot offer loyalty to employees and so should not expect it. </p>
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<a href="https://theconversation.com/mass-layoffs-increase-teen-suicide-rates-30710">Mass layoffs increase teen suicide rates</a>
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<p>Rather than <a href="http://www.abc.net.au/news/2018-08-22/telco-wrap-nbn-new-ceo-tpg-vodafone-talks-optus-cuts-jobs/10151410?section=business">shedding jobs in favour of technology</a>, and at a minimum, organisations should offer training to prepare people for the time they will no longer be needed. And, respecting <em>pathos</em> (emotional understanding), treat departing employees with care and respect.</p>
<p>A drop in share price is a sign shareholders lack confidence in the <em>logos</em> (reasoned logic) of an organisation’s strategy. But there are other, more subtle signals an organisation has over-played its digital capabilities. </p>
<p>An example is the reputational damage to organisations that use cybervetting - seeking information about job applicants from social media and search engines. <a href="http://onlinelibrary.wiley.com/doi/10.1002/9781118955567.wbieoc054/full">Studies of cybervetting</a> show some employers use technology to better their business at potentially the expense of good management. </p>
<p>Employers see cybervetting as a digital extension of background checking that increases organisational efficiency. Some even see it as the beginning of an employment relationship. But applicants disagree with this logic, perceiving the practice as unfair. </p>
<p>Cybervetting reduces applicants’ trust and identification with the organisation because they perceive it as lacking <em>ethos</em> (credibility and autheniticity). Its reputation is damaged in their eyes so they are less likely to accept a job offer.</p>
<h2>Framing a solution</h2>
<p>Applying technology to organisational processes is part of working smarter, not harder. Careful management is the other part. But as organisations’ technological capacities grow, managers need to ask themselves what is possible and desirable when using technology. </p>
<p><em>Logos</em> (reasoned logic) and <em>ethos</em> (credibility and authenticity) will be useful as they do this. Then, using <em>pathos</em> (emotional understanding), they must try to understand how others are likely to frame their answers to similar questions. </p>
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Read more:
<a href="https://theconversation.com/why-the-end-of-auto-manufacturing-wont-be-as-apocalyptic-as-previous-mass-layoffs-85521">Why the end of auto manufacturing won't be as apocalyptic as previous mass layoffs</a>
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<p>Applicants, unlike employers, don’t see cybervetting as a more efficient replacement for personal interaction during the early stages of an employment relationship. To use <a href="https://books.google.com.au/books?id=nz1RT-xskeoC&printsec=frontcover&dq=karl+e+weick&hl=en&sa=X&ved=0ahUKEwjHy7OH4Y3YAhUOObwKHRdSAaQQ6AEIKTAA#v=onepage&q=karl%20e%20weick&f=false">Karl Weick’s term</a>, job applicants and employers <a href="https://pdfs.semanticscholar.org/c5ef/1af1d6b68ed0d97b7aa19de748550a379fa7.pdf">make sense</a> of the same situation differently. </p>
<p><a href="http://classics.mit.edu/Aristotle/rhetoric.1.i.html">Aristotle’s ancient typology of management skills</a> promises to remain useful as digital solutions - and dilemmas - increase.</p><img src="https://counter.theconversation.com/content/88072/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mary Barrett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Management trumps technology in making companies productive, but that doesn’t mean firms can be complacent when it comes to keeping up with change.Mary Barrett, Professor of Management, University of WollongongLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/932832018-03-14T00:10:48Z2018-03-14T00:10:48ZWhat the Royal Commission can do if the banks don’t play ball on evidence<p>At the <a href="https://financialservices.royalcommission.gov.au/public-hearings/Pages/round-1-hearings.aspx">first round of hearings</a> of the Financial Services Royal Commission, the counsel assisting, Rowena Orr QC, was unimpressed with the material some of the banks have provided. The Commonwealth Bank provided two submissions, the first of which, according to Orr:</p>
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<p>…adopted a high level and general approach, which meant that it did not disclose the totality of the conduct that it has engaged in…</p>
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<p>The CBA’s second submission was no more helpful: it consisted primarily of a large number of spreadsheets. Orr said these were “not in a form which made it possible to easily understand the type and the scale”, of CBA’s conduct.</p>
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<a href="https://theconversation.com/broad-mandate-for-financial-services-royal-commission-takes-the-heat-off-banks-88391">Broad mandate for financial services royal commission takes the heat off banks</a>
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<p>CBA wasn’t alone; the National Australia Bank also won a mention from Orr for “failing to grapple with the task” set by the commissioner.</p>
<p>Can the Royal Commission do anything to get more useful information out of the banks? There are two issues here: what the Royal Commission can make the banks do, and what it has to ask the banks to do.</p>
<h2>What can the Royal Commission make the banks do?</h2>
<p>The Royal Commission has several powers under the <a href="https://www.legislation.gov.au/Details/C2018C00049">Royal Commissions Act 1902</a> that might be used here. Failure to comply with the Royal Commission’s requirements under these powers is punishable by up to two years’ imprisonment.</p>
<p>The Royal Commission can require the banks to produce documents. But this is not a power to make the banks create new documents to help the Royal Commission.</p>
<p>The Royal Commission can require witnesses to give evidence. Using this power, the Royal Commission could make key personnel within the banks attend the Royal Commission and answer questions about the bank’s conduct.</p>
<p>It can also require a person to provide information, or a statement, in writing. This is probably limited to matters the person already knows about; it’s not a power to order a person to conduct investigations to provide a full picture of a bank’s conduct.</p>
<h2>What the commission can ask for</h2>
<p>Quite apart from its coercive powers, the Royal Commission can ask the banks to provide the material it wants, in the form it wants. In fact, the commissioner wrote to the banks the day after the commission was established, inviting them to make submissions. It was in response to this invitation that CBA and NAB provided the documents Rowena Orr QC referred to on the first round of hearings.</p>
<p>The Royal Commission could ask the banks, for example, to provide as much or as little detail as the commission needs; to create summaries or chronologies of events; to explain how to interpret technical documents; to provide a full account of a specified event. </p>
<p>It would then be up to the banks as to whether (and when) they comply with the requests.</p>
<p>The banks have <a href="https://www.westpac.com.au/about-westpac/media/media-releases/2017/30-november/">announced</a> their intention to cooperate with the Royal Commission. Given this, it would be surprising to see the banks defying any reasonable requests for additional documents or information without giving a good reason.</p>
<p>But it’s not quite as simple as “ask and it shall be given you”. Banks hold millions of documents.</p>
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Read more:
<a href="https://theconversation.com/banks-and-financial-providers-one-step-ahead-of-consumers-who-struggle-with-personal-bias-91228">Banks and financial providers one step ahead of consumers who struggle with personal bias</a>
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<p>Each bank stores its documents in a system that suits the bank’s operational needs, and is unlikely to align with the Royal Commission’s priorities. A request to collate all documents on a given topic might take the bank many hours of searching and analysis across multiple databases. The banks then may have to return to the Royal Commission to clarify what is required.</p>
<p>There’s nothing to stop the Royal Commission using both coercive and cooperative techniques. It may, for example, ask banks to provide an overview of the handling of certain complaints, and then require the banks to produce certain documents mentioned in that summary. </p>
<p>But a combination of asking and demanding may be needed to get the information the Royal Commission needs.</p><img src="https://counter.theconversation.com/content/93283/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anna Olijnyk's superannuation fund has shares in several banks.</span></em></p>The Financial Services Royal Commission can ask the banks for the material it wants, in the form it wants.Anna Olijnyk, Lecturer, Adelaide Law School, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/881562018-02-18T19:15:17Z2018-02-18T19:15:17ZFactCheck: do bank profits ‘belong to everyday Australians’?<figure><img src="https://images.theconversation.com/files/196422/original/file-20171127-14028-1qzwq26.png?ixlib=rb-1.1.0&rect=3%2C0%2C1130%2C649&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bank branch employees featured in the Australian Bankers' Association national advertising campaign.</span> </figcaption></figure><blockquote>
<p>A lot of people don’t know that nearly 80% of all Australian bank profits go straight back to shareholders and the majority of those shareholders are everyday Australians who own bank shares through their super funds.</p>
<p><strong>– Excerpt from the Australian Bankers’ Association ‘<a href="https://www.banksbelongtoyou.com.au/">Australian Banks Belong To You’ campaign</a>, November 2017 – February 2018</strong></p>
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<p>Following <a href="https://theconversation.com/grattan-on-friday-nationals-force-reluctant-turnbull-to-dress-in-shortens-banking-clothes-88422">mounting pressure</a> from Labor and some National Party MPs, the Turnbull government in December <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">established</a> a Royal Commission into misconduct in the banking, superannuation and financial services industry. Public hearings are now underway.</p>
<p>At the same time, the Australian Bankers’ Association (ABA) has been running a national advertising campaign in which bank branch staff talk about who benefits from bank profits.</p>
<p>The advertisements – broadcast on national television, published in newspapers, shared on social media and displayed on ATMs – state that “nearly 80% of all bank profits go straight back to shareholders and the majority of those shareholders are everyday Australians who own bank shares through their super funds”.</p>
<p>The ABA says bank profits “don’t belong to the banks, they belong to everyday Australians like you”.</p>
<p>Is that right?</p>
<h2>Checking the source</h2>
<p>The Conversation contacted the Australian Bankers’ Association requesting sources and comment, but did not receive a response. </p>
<p>On the “Australian Banks Belong To You” <a href="https://www.banksbelongtoyou.com.au/">campaign website</a>, the association cites these references:</p>
<blockquote>
<p>The “nearly 80%” figure refers to the dividend payout ratio of the 8 key Australian retail banks averaged over 2016 and 2017. The data are sourced from bank annual reports. The dividend payout ratio is calculated as the sum of the dividends paid divided by the sum of cash earnings.</p>
<p>According to the ATO more than 14.8 million Australians have at least one superannuation fund account (around 40% have more than one). It’s safe to say that many super funds invest in Australian bank shares as part of their portfolio.</p>
<p>This means that millions of Australians own bank shares.</p>
</blockquote>
<h2>Verdict</h2>
<p>The Australian Bankers’ Association claimed that “nearly 80% of <em>all</em> Australian bank profits go straight back to shareholders”. While we can’t say whether that’s correct for <em>all</em> Australian banks, the statement is broadly correct for Australia’s eight largest retail ABA member banks over the last five years.</p>
<p>The association’s claim that “the <em>majority</em> of those shareholders are everyday Australians who own bank shares through their super funds” is reasonable.</p>
<p>But if you read those statements together as meaning 80% of profits go to <em>Australian</em> shareholders, that would be incorrect. That’s because a proportion of dividend payouts go to non-resident shareholders.</p>
<p>For example, if a dividend was paid on 31 December 2017 by Australia’s ‘Big Four’ banks, non-resident investors would have received between 21.21% and 26.5% of any dividends declared – meaning Australian investors would have received closer to 60% of profits.</p>
<hr>
<h2>Do ‘nearly 80% of bank profits go straight back to shareholders’?</h2>
<p>The Australian Bankers’ Association (ABA) is an advocacy group representing the interests of the Australian banking industry. The ABA has <a href="https://www.bankers.asn.au/about-us/members/">24 member banks</a>, but the claim about what percentage of profits are paid to shareholders doesn’t cover all of its 24 members.</p>
<p>On the “Australian Banks Belong To You” <a href="https://www.banksbelongtoyou.com.au/">campaign website</a>, the ABA said it based its “nearly 80%” claim on “the dividend payout ratio of the eight key Australian retail banks averaged over 2016 and 2017”, with the numbers sourced from bank annual reports.</p>
<p>Dividends are cash payments that listed companies make to their shareholders. The cash payments are often made regularly. The “dividend payout ratio” is the sum of the dividends paid to shareholders in a year, divided by the sum of the cash earnings the company made.</p>
<p>In other words, the dividend payout ratio is the portion of corporate profits that are paid directly back to shareholders. Companies retain the rest of profits, usually to finance future growth.</p>
<p>While the ABA didn’t name the banks it based its claim on, the eight largest retail banks in the ABA are the Commonwealth Bank, National Australia Bank, ANZ, Westpac, Bank of Queensland, Bendigo Bank, Suncorp and Macquarie Bank.</p>
<p>If we look at dividend payout ratios for those eight banks since 2013, we can see that the overall average payout has consistently hovered around 80% for the past five years. </p>
<p>The same is true of the average payout of the ‘Big Four’ Australian banks – Commonwealth Bank, Westpac, ANZ and National Australia Bank.</p>
<iframe src="https://datawrapper.dwcdn.net/s19mS/3/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<p>In 2012, an outlying dividend payout caused the average dividend payout to appear abnormally high. In the preceding five-year period from 2007 to 2011 payout ratios were lower, as you can see in the chart below. </p>
<iframe src="https://datawrapper.dwcdn.net/ZLkDS/1/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<h2>Do profits ‘belong to everyday Australians’?</h2>
<p>The ABA claimed that of those bank profit distributions, the “majority” go to Australians, including “millions of everyday Australians who own bank shares through their super funds”.</p>
<p>The ABA did not define what it meant by “everyday Australians”. In justifying its claim, the ABA correctly cited Australian Tax Office data that shows that as of June 30, 2016, <a href="https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/Super-accounts-data/Super-accounts-data-overview/">more than 14.8 million</a> Australians had at least one superannuation fund account. </p>
<p>On its website, the ABA stated it’s “safe to say that many super funds invest in Australian bank shares as part of their portfolio”. </p>
<p>Superannuation funds do typically hold a balanced portfolio that represents the major members of the Australian Stock Exchange (ASX). A typical superannuation portfolio might invest in bonds, and in a portfolio of the largest 200 stocks on the ASX, which would include the major banks. This can be subject to individuals’ investment preferences.</p>
<p>For example, say the fund invests in the largest 200 companies on the ASX, and invests in proportion to the companies’ size (that is – the largest companies get the largest investment). Then, the big four banks would be <a href="https://au.spindices.com/indices/equity/sp-asx-200">four of the five</a> largest investments.</p>
<p>Obviously, not all superannuation accounts invest in bank stocks, and portfolios can be structured in different ways. For example, some superannuation funds allow their members to invest only in bonds, and people with self managed superannuation funds choose their own investments. </p>
<p>Some wealthy shareholders, and overseas shareholders, also benefit from holding Australian bank shares. As with all companies, shareholders benefit in proportion to their shareholding. Listed banks have no say over whether wealthy Australians, or overseas buyers, purchase their shares.</p>
<p>But it is fair to say that “millions of everyday Australians who own bank shares through their super funds” benefit from dividend payouts. <strong>– Mark Humpherey-Jenner</strong></p>
<h2>Blind review</h2>
<p>The Australian Banking Association claimed that nearly 80% of all Australian bank profits go back to shareholders, and that the majority of those shareholders are everyday Australians who own bank shares through their super funds. </p>
<p>Those claims are valid when read independently, as set out above. But they should not be read together as indicating that nearly 80% of profits go to Australian shareholders.</p>
<p>The proportion of dividends that go back to Australians, either directly or through their investment portfolios, would be less than 80% of bank profits. </p>
<p>Reviewing the investor profiles of <a href="http://shareholder.anz.com/share-registry-profile">ANZ</a>, <a href="https://www.commbank.com.au/about-us/shareholders/shareholder-information/investor-breakdown-by-type-domicile.html">CBA</a>, <a href="https://www.nab.com.au/about-us/shareholder-centre/Share-register-profile">NAB</a> and <a href="https://www.westpac.com.au/about-westpac/investor-centre/westpac-share-information/share-registry-profile/">Westpac</a> shows that on December 31, 2017, Australian investment ranged from 73.5% to 78.79% across the big four banks, and institutional investment, which includes superannuation funds and other financial institutions, represented slightly under half of investors.</p>
<p>The high representation of domestic institutional holdings demonstrates the significance of bank shares in most investment portfolios, including superannuation funds.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=184&fit=crop&dpr=1 600w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=184&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=184&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=231&fit=crop&dpr=1 754w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=231&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=231&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Foreign ownership of Australian banks. NAB presents the data in a different way to the other banks.</span>
<span class="attribution"><span class="source">Author provided based on reports from ANZ, CBA, NAB, Westpac</span></span>
</figcaption>
</figure>
<p>So if a dividend had been paid on 31 December 2017 for Australia’s ‘Big Four’ banks, non-resident investors would have received between 21.21% and 26.5% of that dividend declared, meaning Australian investors would have received closer to 60% of profits. <strong>– Helen Hodgson</strong></p>
<hr>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Conversation FactCheck is accredited by the International Fact-Checking Network.</span>
</figcaption>
</figure>
<p><em>The Conversation’s FactCheck unit is the first fact-checking team in Australia and one of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. <a href="https://theconversation.com/the-conversations-factcheck-granted-accreditation-by-international-fact-checking-network-at-poynter-74363">Read more here</a>.</em></p>
<p><em>Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at <a href="mailto:checkit@theconversation.edu.au">checkit@theconversation.edu.au</a>. Please include the statement you would like us to check, the date it was made, and a link if possible.</em></p><img src="https://counter.theconversation.com/content/88156/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner has investments in superannuation funds that hold a diversified portfolio of stocks, which includes banks.</span></em></p><p class="fine-print"><em><span>Helen Hodgson has investments in superannuation funds that have a diversified portfolio of shares, including banks. Helen Hodgson receives funding from AHURI and the ARC. Helen is a member of the Social Policy Committee and a Director of the National Foundation for Australian Women, and is on the Tax and Superannuation Advisory Panel of ACOSS. Helen was a Member of the WA Legislative Council in WA from 1997 to 2001, elected as an Australian Democrat. She is not a current member of any political party. </span></em></p>The Australian Banking Association says ‘nearly 80% of bank profits go straight back to shareholders’, the majority of whom are ‘everyday Australians’. Is that right?Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/883912017-11-30T19:06:55Z2017-11-30T19:06:55ZBroad mandate for financial services royal commission takes the heat off banks<p>It does seem anomalous that the major banks have now become supporters of the royal commission into financial services, given they have been the principal targets. But the alternatives are probably less palatable, particularly if the banks think that all past major issues of misconduct and immoral behaviour have already been brought to light. And the broadening of the terms of reference beyond banking may dilute the focus on the banks themselves.</p>
<p>The banks <a href="http://www.asx.com.au/asxpdf/20171130/pdf/43pr4y07l7v0v6.pdf">argue that ongoing speculation</a> and uncertainty are creating unnecessary costs and distractions for them, and that is most likely the case. Even if the major banks were to spend A$100 million in dealing with the royal commission that is less than 0.3% of the annual profits of the majors – so it has little impact on shareholder returns. </p>
<p>And with annual interest expenses in the order of <a href="http://www.apra.gov.au/adi/Publications/Documents/2908-QADIPS-Jun-2017-PDF.pdf">A$65 billion</a>, a cost of A$100 million or so could be quickly offset by improvements in bank borrowing costs from resolution of uncertainty. Whether the government spending a similar sum of taxpayer money on a royal commission is worthwhile is another matter.</p>
<h2>Terms of reference too broad</h2>
<p>The <a href="https://cdn.tspace.gov.au/uploads/sites/72/2017/11/DRAFT-TERMS-OF-REFERENCE.pdf">draft terms of reference</a> of the royal commission ask it to focus primarily on three issues involving financial service entities. One is the essentially legal issue of identifying past cases of misconduct in violation of regulations and laws, as well as what might be termed “misbehaviour” (legal but immoral or unethical or unfair activities). </p>
<p>One apparent omission in the draft terms of reference relates to credit – and lending has been a <a href="https://theconversation.com/mortgage-brokers-asic-goes-fishing-60040">major problem area in the past</a>. While bank lending is covered, the definition of financial services entities to be considered does not appear to include those (such as mortgage brokers and some lenders) who only require an Australian Credit Licence and not an Australian Financial Services Licence (AFSL). Likewise, some financial services entities are exempt from the AFSL requirement and that may prove problematic if the draft terms of reference are not amended.</p>
<p>The boards and senior management of the banks (and other entities) no doubt hope there are no hidden skeletons in the closets which may be uncovered to shock them, and that revisiting the known past problems will be a case of yesterday’s news.</p>
<p>Although the term “misbehaviour” strays into grey areas of defining consistency with “community standards and expectations”, identifying past misconduct is a task suitable for a royal commission. But it shouldn’t be needed. ASIC and other regulators have adequate powers (if not adequate resources) to identify and prosecute misconduct. The adequacy of those powers is also a topic for the commission.</p>
<p>The second major task of the royal commission is to identify whether misconduct and misbehaviour can be attributed to poor culture and governance practices. This is particularly problematic.</p>
<p>What evidence is to be used to show, beyond reasonable doubt, that there is a causal relationship from the amorphous, non-quantifiable, concepts of culture and governance to specific instances of, or general proclivity towards, misconduct? There’s also undoubtedly many positive behaviours and outcomes occurring within these institutions they could point to, which may imply that, on balance, the arrangements are not bad. </p>
<p>So, the third question the commission then faces, is what changes might be made to reduce these problems. Here, the danger is that it involves a step into the unknown – what would be the likely outcomes under any proposed changes. </p>
<p>In its task of making recommendations, the commission faces a number of other difficulties. There is a raft of <a href="https://theconversation.com/budget-2017-lack-of-competition-is-why-government-is-moving-so-hard-against-the-banks-77397">regulatory changes in progress</a> following on from the <a href="http://fsi.gov.au/publications/final-report/">2014 Financial Services Inquiry</a> and other government <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">policy initiatives</a>. </p>
<p>Also relevant is the financial technology or “fintech” revolution creating new business models, products and services, and methods of customer interaction with financial services entities. These create potential for new types of misconduct and misbehaviour. How relevant lessons the royal commission draws from history will be for this new world is unclear.</p>
<p>The banks will no doubt be pleased that the scope of the royal commission encompasses most of the financial services sector rather than focusing primarily upon them. In particular, the <a href="https://cdn.tspace.gov.au/uploads/sites/72/2017/11/DRAFT-TERMS-OF-REFERENCE.pdf">reference to superannuation fund trustees</a> and use of member funds would seem to bring the controversial issue of fund governance right to the fore and will partly distract attention from the banks.</p><img src="https://counter.theconversation.com/content/88391/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Broadening the royal commission beyond banking may dilute the focus on the banks themselves.Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/873192017-11-15T21:28:09Z2017-11-15T21:28:09ZThe public should be ‘shocked, dismayed and disgusted’ at the major banks<figure><img src="https://images.theconversation.com/files/194740/original/file-20171115-11234-330fag.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">ANZ and NAB have settled with ASIC over manipulation of the Bank Bill Swap Rate.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The Australian public should be dismayed and disgusted that the major banks are still attempting to cover up the <a href="https://theconversation.com/asic-finally-pulls-the-bbsw-trigger-on-anz-55766">extent of their complicity</a> in manipulating the Bank Bill Swap Rate (BBSW), a key interest rate benchmark. </p>
<p>For years, the banks covered up the involvement of their traders in manipulating not only interest rate but also foreign exchange benchmarks, by attempting to outspend the corporate regulator, ASIC, in the courts, using shareholders’ money. </p>
<p>Faced with publication of the evidence they <a href="http://www.smh.com.au/business/banking-and-finance/public-should-be-shocked-judge-clears-nab-anz-100m-raterigging-settlements-20171110-gziufh.html">caved in at the very last minute</a> to settle with ASIC, paying even more shareholders’ funds, for fines and legal costs. </p>
<p>Has any director or senior manager taken personal responsibility, <em>or even apologised</em>, for either the rampant misconduct or the failure to monitor it – No! </p>
<h2>Little contrition</h2>
<p>In a <a href="http://www.media.anz.com/phoenix.zhtml?c=248677&p=irol-news&nyo=0">short media release</a>, ANZ acknowledged, with little contrition, that </p>
<blockquote>
<p>in the course of trading on the BBSW market, a small number of traders attempted to engage in unconscionable conduct on ten dates between September 2010 and February 2012. ANZ also did not have in place adequate policies and systems to monitor trading and communications of its BBSW traders.</p>
</blockquote>
<p>But we should not be fooled by the references to the “small number of traders”, or “ten dates”. </p>
<p>Last year, CBA and NAB <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-455mr-asic-accepts-enforceable-undertakings-from-nab-and-cba-to-address-inadequacies-within-their-wholesale-spot-fx-businesses/">agreed</a> to enforceable undertakings with ASIC in relation to manipulating the foreign exchange benchmark, which was <a href="https://theconversation.com/explainer-how-bankers-fixed-forex-trades-and-why-its-criminal-37525">arguably much more egregious</a> than the BBSW manipulation, as it involved <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-065mr-asic-accepts-enforceable-undertakings-from-westpac-and-anz-to-address-inadequacies-within-their-wholesale-fx-businesses/">sharing of information</a> with other market participants, in particular sensitive information about clients’ trades. </p>
<p>Not one of the directors or senior managers of these banks took personal responsibility for the actions of their staff or their collective failure to monitor such obvious misconduct. </p>
<p>The <a href="http://www.heraldsun.com.au/business/judge-slams-banks-for-trying-to-rig-lending-rate/news-story/8432927f62e431916f2cb8c9e099e6f8">agreement between ASIC, NAB and ANZ stipulates</a> that </p>
<blockquote>
<p>Traders involved in the breaches will have to be retrained before they are allowed back on their banks’ trading floors</p>
</blockquote>
<p>Trading on nonpublic confidential information, which is what “manipulating the bank bill swap rate to their advantage and the disadvantage of others” was, is often punished by <a href="http://www.abc.net.au/news/2017-04-28/businessman-jailed-over-insider-trading/8481724">custodial sentences</a> not some short court-ordered training course. This would just reiterate the rules that the traders <a href="https://afma.com.au/afmawr/_assets/main/LIB90010/Code%20of%20Conduct%20-%20GUIDELINES.pdf">should have been following anyway</a> and which diligent management should have been enforcing.</p>
<p>The failure to monitor staff seems not to have slowed the progress of some senior managers. For example, ANZ CEO <a href="http://shareholder.anz.com/personnel/shayne-elliott-management">Shayne Elliot</a>, was head of ANZ’s Institutional Bank (i.e. trading operations) during most of the period in which the unconscionable conduct took place.</p>
<h2>Why did they pursue the court cases?</h2>
<p>So what were the boards of directors of some of Australia’s largest companies doing while this failure to monitor unconscionable conduct was going on? </p>
<p>While neither superstar chairmen Ken Henry (NAB) nor David Gonski (ANZ) were in place during the original misconduct, they have been in place since 2014 and have had ample opportunity to inquire into the details of the scandal. </p>
<p>Having read the same evidence as Justice Jagot, directors chose to proceed with the case before caving in on the day it was due to be heard in court. Investors should be tearing their hair out at such colossal waste of money on high-priced (and in the end useless) lawyers.</p>
<p>The <a href="https://theconversation.com/dont-believe-the-hype-our-own-libor-scandal-could-be-in-the-wings-12652">LIBOR</a> and <a href="http://www.reuters.com/article/us-eu-commission/eu-commission-fines-banks-2-3-billion-for-benchmark-rigging-idUSBRE9B309Q20131204">foreign exchange</a> scandals cost overseas banks billions of dollars in fines. </p>
<p>Did they really <a href="https://theconversation.com/bbsw-too-dumb-to-understand-57425">believe this time was different</a>, given that other banks had <a href="http://www.abc.net.au/news/2013-03-05/ubs-cheats-target-key-australian-interest-rate/4553564">already pleaded guilty</a> to manipulating BBSW? Even if they were not in place at the time, the non-executive directors of both banks are certainly responsible for continuing this expensive charade.</p>
<p>Such lack of oversight should surely trigger the first investigation when the new Banking Executive Accountability Regime (BEAR) legislation <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">comes into force</a>, as it covers directors and senior managers.</p>
<h2>Pulling no punches</h2>
<p>Federal Court Justice Jayne Jagot certainly pulled no punches in her statutory approval of the settlement between ASIC and the ANZ and NAB banks, saying that the Australian public should be “<a href="http://www.smh.com.au/business/banking-and-finance/public-should-be-shocked-judge-clears-nab-anz-100m-raterigging-settlements-20171110-gziufh.html">shocked, dismayed and disgusted</a>” by the behaviour of the two banks.</p>
<p>The Australian public is right to be perplexed as to why no one considers themselves personally accountable for such a fiasco. And investors must be afraid that in pursuing the failed litigation so far, without apologising, that further harm is not done by <a href="http://www.abc.net.au/news/2016-08-18/anz-nab-bbsw-us-class-action/7763178">possible class action litigation</a> in the United States. </p>
<p>The Australian taxpayer would be justifiably annoyed to learn that the offences admitted by the banks took place between 2010 and 2012, when the very same banks were given the free handout of a <a href="https://www.guaranteescheme.gov.au/qa/deposits.html">government guarantee</a> following the global financial crisis (GFC) - that really is biting the hand that feeds you.</p>
<p>So, should Australian investors, taxpayers and the public be “shocked, dismayed and disgusted” as the judge suggested? Yes.</p>
<p>But recent history suggests that the largest banks will just try to tough it out before returning to their previous modus operandi. Only a <a href="https://theconversation.com/its-time-for-a-royal-commission-into-banking-regulation-86518">royal commission into banking regulation</a> will break this vicious circle.</p><img src="https://counter.theconversation.com/content/87319/count.gif" alt="The Conversation" width="1" height="1" />
The major banks have tried to downplay their role in manipulating the BBSW interest rate benchmark. But this is not the first instance of bad behaviour.Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/865182017-11-08T02:32:24Z2017-11-08T02:32:24ZIt’s time for a royal commission into banking regulation<p>The handling of recent financial scandals show that regulators are confused about what they do, or <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">should do</a>. And as a result the regulation of the financial system, which is vital to a strong functioning economy, is just not working effectively. </p>
<p>We can see the problem in the recent <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F61c9ed97-7db3-4a67-a14e-a5114c0258b8%2F0000%22">testimony to the House Economics Committee</a>. Recounting the sequence of events that led the Commonwealth Bank to inform regulators of the <a href="http://www.austrac.gov.au/media/media-releases/austrac-seeks-civil-penalty-orders-against-cba">alleged breaches of money-laundering legislation</a>, CBA Chair Catherine Livingstone said:</p>
<blockquote>
<p>We were having board meetings at the time I was being called to Canberra by the Treasurer. When the board meeting, which went over multiple days, finished, which was lunchtime on the Wednesday, I immediately phoned the other two regulators, ASIC and APRA.</p>
</blockquote>
<p>This raises a raft of questions. Having known about the allegations of money laundering since 2015, why did CBA not inform the regulators until August 2017? Why did the treasurer warn CBA before CBA talked to the two regulators? When did the Treasurer first hear of the money-laundering breaches? And why did the treasurer not instruct AUSTRAC (an agency of the <a href="https://www.ag.gov.au/CrimeAndCorruption/AntiLaunderingCounterTerrorismFinancing/Pages/AUSTRAC.aspx">Attorney General’s department</a>) to inform <a href="http://asic.gov.au/about-asic/what-we-do/our-role/statements-of-expectations-and-intent/statement-of-expectations-april-2014/">ASIC</a> and <a href="http://www.apra.gov.au/AboutAPRA/Documents/140417-SOE-APRA-Statement-of-Expectations.pdf">APRA</a>? </p>
<p>In a previous parliamentary hearing, Greg Medcraft, Chairman of ASIC, had <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F61c9ed97-7db3-4a67-a14e-a5114c0258b8%2F0000%22">said</a>:</p>
<blockquote>
<p>I met two days before with the chairman of the Commonwealth Bank, the chair of risk and the chair of the audit committee… There was no mention of what happened. Then I saw the announcement and, about a week later, the chair called me in to apologise. Timeliness and transparency are big issues in this one</p>
</blockquote>
<p>So, either ASIC and/or APRA were aware of the allegations of money laundering at CBA and took no action <a href="http://www.abc.net.au/news/2017-08-28/commonwealth-bank-to-face-independent-inquiry-apra/8848004">until prompted</a> by the treasurer, or the communications between the various agencies of government are not working as planned. Either way, this is no way to regulate a modern financial system.</p>
<h2>Even more regulatory confusion</h2>
<p>Just as he is due to <a href="http://www.abc.net.au/news/2017-10-17/asic-james-shipton-to-replace-greg-medcraft/9057190">leave his role as head of ASIC</a>, Greg Medcraft managed to end two high profile cases with modest wins. </p>
<p>Both <a href="http://www.afr.com/business/banking-and-finance/why-anz-and-nab-settled-asics-bbsw-case-20171026-gz9d90">ANZ Bank</a> and <a href="http://www.smh.com.au/business/banking-and-finance/nab-admits-staff-wrongdoing-as-it-settles-bbsw-20171027-gz9zva.html">NAB</a> have settled with ASIC for their parts in <a href="https://theconversation.com/years-on-asic-still-grappling-with-swap-rate-fixing-scandal-35851">manipulating the BBSW intereset rate benchmark</a>. Although the settlement remains to be approved by the Federal Court. </p>
<p><a href="http://www.abc.net.au/news/2017-10-25/rate-rigging-trial-adjourned-anz-nab-finalise-settlement/9083894">Westpac</a> remains the hold out, and the <a href="http://www.smh.com.au/business/banking-and-finance/westpac-traders-talked-openly-about-rigging-interest-rate-asic-alleges-20171030-gzbgx6.html">prosecution’s case has opened</a> in the Federal Court.</p>
<p>But in the euphoria at ASIC, a niggling question remains – what about the Commonwealth Bank?</p>
<p>For some time, Medcraft has <a href="http://www.theaustralian.com.au/business/opinion/john-durie/asic-and-cba-hold-their-ground-on-bank-bill-swap-rate-case/news-story/9b50dc7f7628ac630ac37c11e0e2ce33">warned</a> that action against CBA had not been ruled out and that <a href="http://www.smh.com.au/business/banking-and-finance/cba-braced-for-fourth-rate-rigging-case-20160608-gpecc4.html">information was being gathered</a>. Recently Medcraft confirmed that the regulator had “plenty of time” to <a href="http://www.financialservicescareer.com.au/news/regulator-circling-cba">take action against CBA</a>.</p>
<p>This also raises a number of questions. Not least why ASIC has not filed claims against CBA or announced that there would be no action taken against the bank. If CBA has no case to answer then ASIC should come out and exonerate the bank and relieve its long-suffering shareholders. </p>
<p>But if CBA has even a minor case to answer, and the regulator has held off hoping that the bank would settle without going to court, then ASIC may have been much too clever for their own good.</p>
<p>As a result of a <a href="http://www.abc.net.au/news/2017-08-23/commonwealth-bank-faces-shareholder-class-action/8833860">shareholder action</a> following the alleged money-laundering scandal, ASIC is <a href="http://www.abc.net.au/news/2017-08-11/asic-to-investigate-cba/8796542">now looking at</a> whether the CBA board “complied with continuous disclosure laws when it decided not to alert investors to the suspicious behaviour”.</p>
<p>This leaves ASIC in an extremely difficult position - looking at a possible failure to disclose the money-laundering scandal at CBA, while at the same time hinting that CBA may have done the same thing with BBSW.</p>
<p>But ASIC is not the only regulator to be operating in the dark. The latest Banking Executive Accountability Regime (BEAR) legislation only adds to the <a href="https://theconversation.com/bankings-new-bear-is-a-teddy-bear-not-a-grizzly-85687">confusion</a> on how best to regulate financial services.</p>
<p>When questioned in recent <a href="http://parlinfo.aph.gov.au/parlInfo/download/committees/estimate/c419b06c-d059-4ecb-b033-6d08bd9b7c6d/toc_pdf/Economics%20Legislation%20Committee_2017_10_26_5679.pdf;fileType=application%2Fpdf#search=%22rowell%22">Senate Estimates</a> about the regulatory impact statements that have been done for <a href="https://www.legislation.gov.au/Details/C2017B00229/Explanatory%20Memorandum/Text">new BEAR legislation</a>, Helen Rowell, deputy Chair of APRA, replied that she personally had “not seen them; I couldn’t say whether anyone else within APRA has seen them”. </p>
<p>This is despite the fact that APRA has been given an extra A$40 million over four year to handle the new legislation - for what, and where did this figure come from? </p>
<p>Again, this is no way to regulate a banking system. The confusion around what regulators do and how they do it, must be sorted out. </p>
<h2>Where next?</h2>
<p>The most obvious answer to clearing up this mess is to initiate a royal commission that looks specifically at banking regulation. In particular, what form a modern banking regulation system should take; which regulators should do what; what the responsibilities of parliament, ministers and regulators should be; and how regulators should share information and tackle common problems (such as <a href="https://theconversation.com/why-bankers-so-often-fail-to-comply-with-policies-and-regulations-82159">banking culture</a>).</p>
<p>Such a royal commission should concentrate on clearing up issues of regulatory philosophy, structure, legal requirements and administration. Whether or not there is an <a href="http://www.abc.net.au/news/2017-10-30/coalition-mps-may-cross-floor-for-banking-royal-commission/9100838">all-purpose banking royal commission</a>, the failures in the current system have to be remedied.</p>
<p>Of course, the government has only got itself to blame for getting in this mess. </p>
<p>The government’s own <a href="http://fsi.gov.au/">Murray Inquiry into the Financial System</a> made a recommendation that could have helped. The inquiry recommended the establishment of a new <a href="https://theconversation.com/to-clean-up-the-financial-system-we-need-to-watch-the-watchers-38359">Financial Regulator Assessment Board</a> (FRAB), which would:</p>
<blockquote>
<p>advise government annually on how financial regulators have implemented their mandates. Provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.</p>
</blockquote>
<p>Sounds sensible? Not to the government, as it chose to accept all of the major recommendations of David Murray’s inquiry <a href="https://treasury.gov.au/publication/government-response-to-the-financial-system-inquiry/attachment-government-response-to-financial-system-inquiry-recommendations/">except for this one</a>. </p>
<p>And, instead of having one professional body that looks at the performance of regulators, there has been a nonstop procession of “independent” inquiries, by <a href="https://www.commbank.com.au/guidance/newsroom/comminsure-releases-deloitte-report-into-claims-handling-201702.html">banks themselves</a>, the <a href="https://www.bankers.asn.au/media/media-releases/media-release-2016/review-into-retail-banking-remuneration-begins">banking industry </a>and even <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">regulators</a>. No big picture, just a patchwork of unconnected recommendations. And undoubtedly <a href="http://www.heraldsun.com.au/business/bank-chiefs-deny-raterise-gouging-at-parliament-hearing/news-story/0cedbd4a36dc41a731780a8054ff8524">more to come</a>. </p>
<p>An opportunity missed.</p><img src="https://counter.theconversation.com/content/86518/count.gif" alt="The Conversation" width="1" height="1" />
Parliamentary hearings reveal a lot of confusion between government, regulators and industry around banking regulation. This needs to be fixed.Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/774752017-05-10T06:30:27Z2017-05-10T06:30:27ZBudget bank levy: too big to fail, not too big to take a hit<p>The budget announcement of a 0.06% levy on a subset of bank liabilities looks arbitrary, and is certainly politically opportunistic. But it could be rationalised as a response, albeit probably not the best response, to offset a number of distortions in Australia’s banking market. </p>
<p>The levy will certainly have consequences for bank pricing, forms of funding and competition – and will interact in complex ways with other prudential regulatory changes in the pipeline. </p>
<p>The levy will affect the four major banks and Macquarie. It will apply to liabilities other than deposits protected by the Financial Claims Scheme (ie. under A$250,000) and additional Tier 1 capital instruments. </p>
<p>As a ballpark estimate, it will apply to around 50% of a bank’s total funding. This will raise the overall cost of funding for the affected banks by around 0.03%.</p>
<p>The large banks are perceived to receive a competitive benefit (lower borrowing costs) from an implicit government guarantee associated with being <a href="https://theconversation.com/au/topics/too-big-to-fail-3747">“too big to fail”</a>. On this basis, the levy could be seen as a charge for that benefit. </p>
<p>As it is in Europe, Australia could establish a “resolution fund” to enable the Australian Prudential Regulation Authority (APRA) to facilitate a smooth exit (i.e. by merger) of a failing bank. Although the government is going to set this levy aside for budget repair, rather than being set up in another separate fund, it could be argued that it strengthens the government to support APRA in regulating the banks. </p>
<p>The nature of the regulatory system (such as capital adequacy requirements) creates a competitive imbalance favouring the big four banks. The <a href="https://theconversation.com/apra-fiddles-on-bank-risk-while-rome-burns-72976">imposition of higher minimum capital requirements</a> for mortgage loans by banks (five banks were actually subject to this levy) was only a partial response to this imbalance.</p>
<p>It’s often argued Australian banks have relied too much on funding other than “core/stable” deposits and capital, with potential consequences for safety and systemic stability. Indeed, the large banks have funded their increased share of home mortgage lending since the global financial crisis to a significant degree from wholesale borrowings.</p>
<p>However, there are better ways of dealing with these perceived distortions than the government’s quick, politically opportunistic, measure. And, together with other bank accountability measures introduced in the budget, it may neutralise whatever support exists for a banking royal commission.</p>
<p>The levy is likely to have significant effects on financial markets and consumers of financial services. The levy will flow through the banks’ funds transfer pricing systems to affect loan pricing. </p>
<p>In this regard it is somewhat silly to suggest simultaneously that the big banks shouldn’t increase loan interest rates, as the treasurer has, but that the measure will improve the competitive position of smaller banks. The latter will happen only if the large banks do respond in that way!</p>
<p>The large banks will have incentives to fund loans differently. In particular, by originating and then securitising loans (pooling various types of contractual debt, to get them off-balance sheet and funded by the capital market) they will avoid the levy on that part of their activities.</p>
<p>However, that benefit won’t apply if they use “covered bond” securitisation. This is when a bank issues debt securities collateralised against a pool of assets, giving the investor a claim against both those assets and the bank in general. The levy is thus likely to give a kick to traditional securitisation over on-balance-sheet lending, but stymie the growth of covered bond funding.</p>
<p>The levy will also affect the structure of bank deposit interest rates. Because retail deposits are exempt from the levy, the large banks can be expected to bid for these deposits – pushing up the interest rates offered relative to the cost of borrowing in wholesale and large deposit markets. </p>
<p>That’s going to compound the already apparent effect on relative interest rates due to recent and forthcoming liquidity regulations that APRA is applying. But it will worsen the relative returns that superannuation funds can get on (their large) bank deposits and possibly induce them to look to invest more in securitised products. </p>
<p>It’s worth noting that the budget involves changes that will increase competition for retail deposits. One example is the measure allowing individuals to make limited, tax-advantaged contributions to superannuation which can be subsequently withdrawn for a house deposit.</p>
<p>A further likely effect is to encourage banks to make more use of equity capital and additional Tier 1 (AT1) capital funding (that preferences share structures listed on the ASX and held by many retail investors), relative to Tier 2 capital funding (provided by the wholesale and institutional markets), or other wholesale funding. While more capital funding is still required to meet the “unquestionably strong” criteria proposed <a href="http://fsi.gov.au/">by the Murray inquiry</a>, and accepted by the government, it’s far from clear that increased reliance on the complex AT1 is desirable. </p>
<p>The revenue to be raised is large in absolute dollar amount – but is relatively small as a percentage of current bank profits (in the order of 4-5%).</p>
<p>It could be expected that the banks will pass on some part of the levy to customers, or avoid it by shifting to other forms of funding that do not incur the levy, such that the short-run direct impact on after-tax profits and shareholders is somewhat less than that 4-5% figure. </p>
<p>But the big unknown is how the change, in conjunction with a plethora of other ongoing regulatory changes affecting the financial sector, affects the competitive balance between the big banks, smaller bank competitors and capital markets and their prospects in the long run. </p>
<hr>
<p><em>This piece was co-published with <a href="https://pursuit.unimelb.edu.au/live/budget2017-fairness-security-and-opportunity">Pursuit</a>.</em></p><img src="https://counter.theconversation.com/content/77475/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The new levy on banks from the budget is a small hit to their profit but it could have unintended consequences.Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/695542016-11-29T09:32:37Z2016-11-29T09:32:37ZACCC rejects the banks colluding to bargain on Apple Pay<p>The Australian Competition and Consumer Commission (ACCC) <a href="http://www.accc.gov.au/media-release/accc-proposes-to-deny-authorisation-for-banks-to-collectively-bargain-with-and-boycott-apple-on-apple-pay">is planning to deny</a> the Commonwealth Bank of Australia (CBA), Westpac, National Australia Bank (NAB) and Bendigo and Adelaide Bank (the banks), petition to collectively bargain with and boycott Apple on Apple Pay.</p>
<p>Justifying the decision, ACCC chairman Rod Sims said that the likely benefits of allowing the banks to collectively bargain does not outweigh the potential negative affects.</p>
<p>The banks are desperate to get access to Apple phones, not least as ANZ <a href="http://www.smh.com.au/business/banking-and-finance/apple-payled-surge-in-anz-card-customers-drives-rival-banks-to-renegotiate-20160509-goppf0.html">recently claimed a surge</a> in applications for their credit and debit cards after striking a deal with Apple. This shift in consumer behaviour could potentially reduce the customer base of the other banks, simultaneously increasing both ANZ’s customer base and the use of its payments services. </p>
<p>But Apple imposes fees and restrictions that the banks currently find prohibitive.</p>
<p>The banks wanted to bargain with Apple over two key issues. The first is access to the Near-Field Communication (NFC) controller in iPhones, which would enable them to offer their own digital wallets to iPhone customers (in direct competition with Apple’s digital wallet), bypassing Apple Pay. The second is to remove the the restriction Apple imposes on banks, preventing them from passing on fees that Apple charges for the use of its digital wallet.</p>
<h2>It’s all about negotiating power</h2>
<p>At the moment only consumers with certain cards issued by ANZ, American Express and card issuers using Cuscal Ltd as their collective negotiator, are able to use Apple Pay. It’s been <a href="http://www.smh.com.au/business/banking-and-finance/apple-payled-surge-in-anz-card-customers-drives-rival-banks-to-renegotiate-20160509-goppf0.html">reported that ANZ agreed to share with Apple some of the fee</a> it charges to process payments in exchange for access to Apple Pay</p>
<p>If the ACCC had decided in favour of the banks they could have, in theory, used their combined negotiating power to strike an even better deal with Apple. Not only would they have been bargaining from a stronger position, they could also have threatened to boycott Apple Pay for up to three years. </p>
<p>The ACCC argued this have would reduced the competitive tension between the banks in their individual negotiations with Apple, which could also reduce the competition to supply mobile payment services for iPhones. The threat of a boycott could also mean a significant period of uncertainty and would result in decreased choice for the consumers whose banks are involved. The other digital wallet options for the banks are Android Pay and Samsung Pay, both of which are available in Australia, but the iPhone popularity with consumers makes Apple Pay very attractive to both consumers and banks. </p>
<p>The ACCC may have decided against allowing the banks to bargain collectively, as this would also have set a precedent for any future disputes between the banks and their service providers. The banks may have over played their hand by also threatening a boycott against Apple.</p>
<h2>Reduced competition could have knock-on effects</h2>
<p>Another deciding factor in the ACCC’s decision was that digital wallets/mobile payments are still in their infancy in Australia and consumers are already using their contactless cards to do “tap and go” payments. A rash decision now to allow collective bargaining with Apple could distort the mobile payment market and further delay the adoption of this technology.</p>
<p>The use of tap and go payments has risen greatly in recent years, <a href="http://www.smh.com.au/business/retail/110bn-australias-contactless-boom-20160805-gqmg7j.html">accounting for up to 75% of all Visa transactions</a>. This has caused many consumers to question, exactly what the advantages are of digital wallets over contactless cards. The absence of an obvious advantage over other payment methods like contactless cards has slowed the adoption of mobile payments in Australia. Any reduction in competition could stall this even longer.</p>
<h2>What next for Apple pay</h2>
<p>The ACCC’s decision is just a draft at this stage and there’ll be further public consultations. It plans to release its final decision on March 2017, but in the meantime there will be further uncertainty about the adoption and use of digital wallets in Australia.</p>
<p>The banks now have two distinct choices. They can either continue to act collectively and seek to persuade the ACCC that the draft decision is not the correct one, or they can independently approach Apple to see if they can negotiate a better or at least an equivalent deal to that already struck by ANZ.</p><img src="https://counter.theconversation.com/content/69554/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Worthington does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The banks could have used their collective bargaining power not only against Apple for Apple Pay but also stall the adoption of mobile payments in Australia.Steve Worthington, Adjunct Professor, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/694212016-11-25T06:13:26Z2016-11-25T06:13:26ZBanking inquiry findings – ask the wrong questions get the wrong answers<p>This week, Australia hit a new low point in the politicisation of banking regulation. </p>
<p>In a <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Four_Major_Banks_Review/Report">report</a> into the four major Australian banks, the members of the House Standing Committee on Economics were hopelessly divided along party lines about the answers given to them by the bank CEOs.</p>
<p>The <a href="https://theconversation.com/big-four-bank-chiefs-face-parliamentary-committee-experts-react-66400">grilling</a> of the Big Four CEOs was less Stalinist show trial, than an episode of Australia’s Got Talent. It was, as ex-CEO of ANZ said, “<a href="http://www.theaustralian.com.au/business/financial-services/banks-have-no-case-to-answer-former-anz-ceo-mike-smith/news-story/901e86bdab70480960864ca9281b3447">a bit of theatre</a>”. If it wasn’t such an important topic, the whole episode would be farcical.</p>
<p>The members of the government committee tried their best and have produced a set of ten recommendations, some of which are sensible but others betray a naiveté.
For example, in Recommendation 2:</p>
<blockquote>
<p>The committee recommends that, by 1 July 2017, the Australian Securities and Investments Commission (ASIC) require Australian Financial Services license holders to publicly report on any significant breaches of their licence obligations within five business days of reporting the incident to ASIC, or within five business days of ASIC or another regulatory body identifying the breach. [In particular,] the consequences for those senior executives and, if the relevant senior executives were not terminated, why termination was not pursued.</p>
</blockquote>
<p>A significant breach in banking, if detected within five days, would almost certainly result in someone, somewhere getting fired pretty quickly. It’s the misconduct that is not detected for years (such as fraud in financial planning) that really causes the problems for bank customers.</p>
<p>The banks may not even be aware of these issues, even the committee acknowledged this:</p>
<blockquote>
<p><a href="CBA">The Commonwealth Bank of Australia</a> was unaware of serious misconduct – including fraud – in its financial planning division prior to a whistle-blower going public in 2013.</p>
</blockquote>
<p>But the problem goes much deeper than the committee members falling out over what to do - they weren’t even looking in the right place. The committee members were asking the wrong questions of the wrong people, and as a result, the got the wrong answers and made the wrong recommendations.</p>
<p>Section 198A of the Australian Corporations Act clearly <a href="http://www.companydirectors.com.au/membership/the-informed-director/what-are-the-general-duties-of-directors">states</a> that:</p>
<blockquote>
<p>The business of a company is to be managed by or under the direction of the directors.</p>
</blockquote>
<p>So, if the buck stops with the board, why did the committee not question the senior directors of the big banks, in particular the chairmen, <a href="http://aicd.companydirectors.com.au/%7E/media/cd2/resources/director-resources/director-tools/pdf/05446-3-13-mem-director-gr-role-of-the-chair_a4-web.ashx">senior independent directors</a> and chairs of risk committees? </p>
<p>This is precisely what parliamentary committees into various cases of misconduct in the UK banking system did, such as with <a href="https://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/inquiries1/parliament-2015/review-failure-hbos-15-16/">HBOS</a>, <a href="http://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news/treasury-committee-publishes-libor-report/">LIBOR</a> and <a href="http://www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/56i.pdf">Northern Rock</a> scandals. The <a href="https://www.oireachtas.ie/parliament/media/committees/inquiryintothebankingcrisis/02106-HOI-BE-Report-Volume1.pdf">Irish parliament</a> did the same for the directors of their largest banks. And, as a consequence of some very brutal questioning, several chairmen and CEOs of these banks fell on their swords.</p>
<p>The House Committee has been very insistent about “<a href="https://au.news.yahoo.com/thewest/a/33311538/banks-must-be-more-accountable-review/#page1">naming and shaming</a>” lower-level executives who commit misdemeanours, why not directors also?</p>
<p>For one thing, it is easy to name the directors of banks. As their roles, responsibilities, CVs and sometimes pictures appear every year in their company’s annual reports. We know how long directors have been in their various roles and, through commentaries in reports, what they are collectively thinking and what remuneration they are receiving.</p>
<p>Australian CEOs come and go, at <a href="http://www.gillianfox.com.au/why-does-australia-have-the-worlds-shortest-ceo-tenure/">increasingly shorter intervals</a>. But once appointed, directors tend to hang around for some time, often the only constants in a long-running scandal.</p>
<p>Perhaps an example might help.</p>
<p>Just this month David Turner, the chairman of the CBA, announced his retirement. In his last (and only) media interview Mr Turner decried the “Trumpism” that was causing “<a href="http://www.afr.com/business/banking-and-finance/cba-chairman-david-turner-on-remuneration-diversity-and-his-legacy-20161104-gsi9rq">bank bashing</a>” in Australia and in an echo of President-Elect Trump himself, blamed the victims:</p>
<blockquote>
<p>“And why don’t we like it? Because there’s some element of life that we feel is slightly unequal, that we’re not totally happy about, and here’s a part that, [banks are] a perfect target.”</p>
</blockquote>
<p>The only admission from Mr Turner was that “maybe” the bank had been slow to pick up the financial planning scandal in 2014. </p>
<p>A look at Mr Turner’s tenure as a director at CBA might give a clue as to why his testimony to a committee in parliament might give some insight into improving the regulation of banking. </p>
<p>David Turner, a chartered accountant by profession, was first appointed a director of CBA a decade ago. In that time, he has shared the boardroom with two CEOs, Sir Ralph Norris and now Ian Narev. In 2010, Mr Turner was appointed chairman and will pass that role onto Ms Catherine Livingstone, another chartered accountant, on New Year’s Day 2017. </p>
<p>Mr Turner’s elevation to chairman occurred at an interesting time. It was just two months after CBA, along with the other Big Four banks, settled a long-running case with the New Zealand Tax authorities for tax avoidance. It was <a href="https://theconversation.com/debunking-the-myth-of-our-well-regulated-banks-9333">collectively the biggest such fines</a> in Australian banking history, CBA <a href="http://www.asx.com.au/asxpdf/20091223/pdf/31my1km4ttyf7m.pdf">coughed up</a> some NZ$264 million as part of it.</p>
<p>In his role as chairman, Mr Turner could not be held to blame for this fine for misconduct, but as a director Mr Turner had signed off on annual reports that insisted that CBA had nothing to answer for in relation to court actions. This was despite that fact that the appeals by CBA and others had been knocked back by <a href="https://theconversation.com/debunking-the-myth-of-our-well-regulated-banks-9333">lower-level courts on several occassions</a> A capacity for not smelling the wind appears to be a necessary attribute for a CBA director.</p>
<p>Mr Turner may have been unlucky, but the New Zealand scandal was not the last that came up at CBA board meetings.</p>
<p>In 2008, CBA acquired Bankwest, a subsidiary of the failing Lloyds bank in the UK. Since then, the bank has been mired in fraud allegations, as customers alleged in a parliamentary inquiry that they were <a href="http://www.smh.com.au/business/comment-and-analysis/cba-threw-its-customers-under-the-bus-20151116-gl0411.html">thrown under the bus</a>. In an echo of the New Zealand case, the bank’s 2016 Annual report, stated the bank expected class actions to be discontinued.</p>
<p>In 2013, whistle blower Jeff Morris brought to the attention of the media the now-famous scandal at <a href="http://www.sbs.com.au/news/article/2014/07/04/explainer-what-commonwealth-bank-has-done-and-how-you-can-fix-it">Commonwealth Financial Planning</a>. In 2014, CBA instituted a compensation scheme, which today is still mired in controversy over CBA <a href="http://www.abc.net.au/news/2015-11-17/cba-flags-long-wait-for-compensation-over-poor-planning-advice/6949712?pfmredir=sm">dragging its feet</a> in paying out customers.</p>
<p>In 2008 a Queensland financial planning firm, Storm Financial, went into liquidation and it was discovered that CBA and most of the other big banks had been lending money to customers to invest with <a href="https://www.themonthly.com.au/issue/2011/february/1299634145/paul-barry/eye-storm">Storm</a>. In 2012, CBA agreed to pay <a href="http://www.smh.com.au/business/banking-and-finance/cba-to-fork-out-136m-in-storm-compensation-20120914-25xan.html">compensation</a> of A$136 million to customers over the Storm collapse. In 2016, the Storm scandal is still alive but <a href="http://www.financialstandard.com.au/news/view/86704577">running out of steam</a>.</p>
<p>In 2014, CBA fessed up to the fact that it had been charging customers for financial advice that had not been given, but as ASIC found this year, the bank has <a href="http://www.afr.com/opinion/columnists/the-banks-get-another-black-mark-20161027-gscdbj">not been very forthcoming</a> in providing customers with compensation. Of course, CBA can truthfully argue that <a href="http://www.afr.com/opinion/columnists/the-banks-get-another-black-mark-20161027-gscdbj">all the other major banks are also avoiding it</a>.</p>
<p>The start of 2016 brought an even bigger scandal at <a href="http://www.abc.net.au/4corners/stories/2016/03/07/4417757.htm">Comminsure</a>, CBA’s Insurance arm, in which sick and dying customers were refused payouts for their illnesses. This was despite the fact that Mr Turner had <a href="http://www.australianbankingfinance.com/banking/cba-saddened-and-disappointed-by-new-scandal/">told shareholders</a> at the previous AGM that “we learnt our lessons from the financial advice situation”.</p>
<p>The final indignity for Mr Turner before retirement was, after having handsomely rewarded CEO Ian Narev with an industry-leading pay packet of some A$12.3 million, the bank’s remuneration report <a href="http://www.smh.com.au/business/banking-and-finance/commbank-caves-in-to-pressure-pulls-plan-to-pay-ceo-ian-narev-a-culture-bonus-20161108-gsl2ly.html">was knocked back by its shareholders</a>. Last year Mr Turner earned considerably less than Mr Narev, but nonetheless <a href="https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/2016-asx/2016_Annual_Report_to_Shareholders_15_August_2016.pdf">took home</a> a not insubstantial A$800,000.</p>
<p>While there is no way that Mr Turner can be seen to be involved personally in these scandals, he has been a director and chairman throughout this period. And the questions he and other directors have to answer, is why did they not see these scandals coming and when the scandals erupted, why did the CBA board have to be dragged kicking and screaming into compensating their customers?</p>
<p>Nor is Mr Turner alone in presiding over disasters. The directors of all of the Big Four banks have, as the House Committee report shows, had their own scandals of tax avoidance, bad financial advice and accusations of market manipulation.</p>
<p>Unfortunately, there is no forum, other than a bank’s AGM, where such questions can be posed and answers demanded.</p>
<p>CEOs are only passing through but directors are there for the long-haul. A CEO, such as Ian Narev cannot reasonably be held responsible for the actions or non-actions of his predecessors but as their direct employers, directors can be questioned as to performance of executives and actions taken or not taken to control staff. </p>
<p>Next time, if there is a next time, the senior directors of the Big Four banks should be requested to attend the committee. Furthermore they should be questioned as a group over two days so that better use can be made of the time available and truly systemic issues can be investigated.</p>
<p>And if a Banking Royal Commission is instituted, the terms of reference should include questioning the key directors in every bank. That will make them sit up and think in the meantime.</p><img src="https://counter.theconversation.com/content/69421/count.gif" alt="The Conversation" width="1" height="1" />
Members of House Standing Committee on Economics should be asking the directors of Australia’s Big Four banks (not the CEOs) different questions, if they really want the right answers.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/692202016-11-22T19:27:02Z2016-11-22T19:27:02ZBusiness Briefing: fixing culture in banking and finance<p>Australian banks have been under intense scrutiny this year after <a href="https://theconversation.com/a-history-of-failed-reform-why-australia-needs-a-banking-royal-commission-64803">various scandals</a> called into question the culture of the industry. But it seems there’s no easy answer to improving culture.</p>
<p>Professor Paul Kofman from Melbourne University was a panellist at an event discussing this exact issue. He says the heart of the problem is the lack of evidence for what types of cultural interventions translate into good business outcomes.</p>
<p>Kofman says bank executives can’t ignore culture anymore because their jobs are on the line, but he also notes they aren’t trained sociologists, so they might not notice problems in culture when they occur.</p>
<p>Instead of looking at the conduct of employees when trying to improve culture, the focus should instead be on the customer and if they are being best served, most of the panellists at the event agreed.</p>
<p>In an industry that has changed a lot over time, Kofman isn’t convinced “big data” on its own will necessarily provide deeper insights into bank culture. He says as long as we’re not sure how to measure culture, having more observations won’t help. Kofman notes much of the exciting data analytics are in fact generated by new financial operators (for example in financial technology and offshore operators) that are currently outside the scope of our regulators.</p>
<hr>
<p><em>Also on the podcast this week, Richard Holden tackles a question about how low borrowing rates affect demand and investment for Ask an Economist.</em></p><img src="https://counter.theconversation.com/content/69220/count.gif" alt="The Conversation" width="1" height="1" />
"Banking culture" has drawn a lot of scrutiny this year, after several high-profile scandals. But Professor Paul Kofman says there isn't much evidence for how to intervene if there's a problem.Jenni Henderson, Section Editor: Business + EconomyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/678342016-10-28T05:23:26Z2016-10-28T05:23:26ZASIC report highlights a deep culture problem in Australia’s banks<p><a href="http://asic.gov.au/regulatory-resources/find-a-document/reports/rep-499-financial-advice-fees-for-no-service/">In it’s latest report</a>, the Australian Securities & Investments Commission (ASIC) found the big four banks sold products to some customers through their adviser network, with a fee for ongoing advice, but the advice was never given. </p>
<p>None of this came to light until the banks were asked by ASIC to look at adviser compensation, following the <a href="http://futureofadvice.treasury.gov.au/Content/Content.aspx?doc=home.htm">introduction</a> of the Future of Financial Advice (FOFA) legislation in 2013. </p>
<p>No wonder the banks were wary of their practices being investigated. Not only has it come to light that many customers (176,000 at the last count) were being charged for services they were not receiving but, in many cases, the banks didn’t have the data they needed to find out whether customers had been dudded or not. </p>
<p>And ASIC is pretty sure why such systemic issues emerge at regular intervals, stating:</p>
<blockquote>
<p>Cultural factors in the banking and financial services institutions covered by this report may have contributed to the systemic failures we observed. </p>
</blockquote>
<p>The ASIC report details the reason for the cultural failings it observed in the wealth management businesses of the major banks:</p>
<blockquote>
<p>Some advice licensees prioritised advice revenue and fee generation over ensuring that they delivered the required services.</p>
</blockquote>
<p>ASIC found that the IT systems in wealth management in the major banks were stone-aged at best. The banks appear to have no idea what they don’t know, but are all working to identify how many more customers need to be compensated. </p>
<p>ASIC also found that some banks failed to keep complete or accurate records to enable compliance to be analysed. And in some cases, authorised representatives had taken customers’ files with them when they left the firms, making it impossible to check whether or not advice was given.</p>
<p>It appears that every time a question is asked of the big banks, another example of bad behaviour is unearthed.</p>
<p>In the recent questioning of bank CEOs by the House Economics Committee, questions were raised with all CEOs about systemic issues. The answers were generally evasive and short on specifics. </p>
<p>For example, when talking about a different but related, <a href="http://www.smh.com.au/business/banking-and-finance/whistleblowers-nab-leak-reveals-persistent-bad-behaviour-in-financial-planning-fuels-royal-commission-calls-20150217-13hv1f.html">financial planning scandal</a>, Andrew Thorburn, NAB CEO, <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F16ed0d6d-13d2-47f1-bade-baa7403a4ebf%2F0000%22">said</a>:</p>
<blockquote>
<p>“We did a review and we had an independent party come and do that review with us, and we concluded and we stand by that, that it was not a systemic issue.”</p>
</blockquote>
<p>What Mr Thorburn and other CEOs neglected to mention was that the banks had, as revealed in ASIC’s report, all already been in the middle of deep discussions about so-called “fee-for-services failures” . The regulator wrote:</p>
<blockquote>
<p>Of particular concern is that many of the banking and financial services institutions covered by this review publicly state that their core values include being customer focused, “doing what is right” for customers, and acting with integrity. We encourage the institutions reviewed in this report to consider how their culture may have supported these systemic failures, and why their stated commitment to providing excellent service to customers is not translating into good outcomes for customers in the many instances we identified in this report.</p>
</blockquote>
<p>At long last, ASIC has highlighted cultural issues across the industry that the boards and management of the largest banks have long refused to acknowledge. </p>
<p>The regulator has done its job and found compelling evidence that <a href="https://theconversation.com/war-on-bankings-rotten-culture-must-include-regulators-42767">the culture of the banks is rotten</a>. </p>
<p>It’s over to the politicians now.</p><img src="https://counter.theconversation.com/content/67834/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An ASIC report detailing how financial advice was paid for but not given by Australia’s big four banks exposes a culture problem that the government needs to deal with.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/664972016-10-05T04:09:18Z2016-10-05T04:09:18ZNew laws on bankers behaving badly don’t matter in light of ASIC inaction<p>The <a href="http://sjm.ministers.treasury.gov.au/media-release/106-2016/">governmnent’s new laws</a> to tackle manipulation of the bank bill swap rate may seem like a crackdown on badly behaving bank employees but in reality the Australian Securities and Investments Commission (ASIC) hasn’t used the full force of the law in the past to prosecute. So perhaps it’s time Australia followed the lead of the US and UK who are really using law to hold banks to account.</p>
<p>The bank bill swap rate (BBSW) is used to set rates on hundreds of trillions of dollars worth of transactions, including interest rates on credit cards, student loans and mortgages. Banks also use the swap rate to determine the cost of borrowing from one another. </p>
<p><a href="http://www.smh.com.au/business/banking-and-finance/banks-scolded-in-bbsw-stoush-20160822-gqy16g.html">Three of Australia’s big four banks, ANZ, Westpac and NAB</a> were accused of manipulating this rate.
These latest measures, which include civil and criminal liability for bankers found guilty, come six years after <a href="https://theconversation.com/asic-finally-pulls-the-bbsw-trigger-on-anz-55766">the scandal first broke</a>. </p>
<h2>ASIC takes too long to prosecute</h2>
<p>ASIC has dragged its feet so spectacularly on prosecuting this rate rigging, misconduct affecting <a href="http://www.abc.net.au/news/2016-07-29/asic-20-trillion-worth-of-financial-products-bbsw/7673322">A$20 trillion worth of financial products</a>. In respect to some of the alleged wrongdoing, the clock has run out, and ASIC is now no longer able to prosecute. Added to that, it was not ASIC that uncovered the BBSW scandal in the first place. </p>
<p>The information was first volunteered by BNP Paribas. And while ASIC’s colleagues in the UK have brought down <a href="http://www.abc.net.au/news/2016-02-08/bagwell-this-could-be-australias-next-financial-scandal/7149270">fines in the billions of dollars against UBS, RBS and Barclays for similar offences,</a> ASIC is yet to dock a dime from our titans of finance. </p>
<p>There have been plenty of legal avenues where ASIC could have pursued the banks.
For example, under <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/cca1995115/sch1.html">section 12.2 of the Schedule to The Criminal Code Act, 1995</a> which allows a court to hold a corporation criminally liable for the criminal misdeeds of its employees. I know of no cases where ASIC has sought to prosecute under this provision. </p>
<p>Another is <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/ba195972/s11ca.html">section 11CA (2)(e) of the Banking Act, 1959</a>. This would allow APRA to remove members of the Board of a bank, and appoint their own nominee, if that bank has demonstrated corporate governance failures. Since 1998 when that provision was enacted, APRA has used it a total of zero times.</p>
<p>It seems the regulators are scared to take on the big banks. For one thing they fear that a misstep could precipitate panic in the market, resulting in a bank run leading to a financial crisis. And if our regulators are ever in any danger of forgetting that, <a href="https://theconversation.com/australian-banks-are-still-too-big-to-fail-44913">the Australian Bankers’ Association is quick to remind them.</a>.</p>
<h2>How this differs to the US and UK</h2>
<p>While Australian regulators have been taking their time, regulators in the UK have brought to trial and <a href="http://www.telegraph.co.uk/finance/financial-crime/11767437/Libor-trial-Tom-Hayes-found-guilty-of-rigging-rates.html">achieved convictions</a>.</p>
<p>Regulators <a href="http://www.euromoney.com/Article/3575486/Macaskill-on-markets-Front-running-and-the-death-of-fixed-income.html?utm_source=Global%2520banking%2520and%2520markets&utm_medium=email%2520editorial&utm_content=Editorial&utm_campaign=636070276563260190&utm_term=Macaskill%2520on%2520markets%253A%2520Front-running%2520and%2520the%2520death%2520of%2520fixed%2520income.%C2%A9rightInfo=true&copyrightInfo=true">in the US have arrested</a>, among others, British citizens, such as Mark Johnson, HSBC’s global head of foreign exchange and Stuart Scott, then head of FX trading in Europe, for manipulating rates while they were in transit in the US.</p>
<p>Deutsche Bank is staring down the barrel of a US$10 billion fine, in the US, for <a href="http://www.newyorker.com/magazine/2016/08/29/deutsche-banks-10-billion-scandal">malpractices it allowed to take place in Russia</a>. Banks in the UK and Switzerland have been fined billions of dollars by US authorities for rigging rates in countries other than the US. All that is required is for the US Department of Justice to detect a malpractice or a fraud that can be shown to have affected US investors. </p>
<p>Already there is legal action in the US in the form of a class action suit against <a href="http://www.abc.net.au/news/2016-08-18/anz-nab-bbsw-us-class-action/7763178">our banks for BBSW rigging.</a> This could garner unwanted attention from US authorities and that could be actual punishment for Australian bankers. </p>
<p>Add to that the possibility that Australian bankers may find themselves under arrest when they pass through the US at any stage in the next five years, and one starts to put into perspective just how badly our regulators have done their job. Ironically, it’s US, not Australian authorities that Australian banks need fear, because of allegations of dishonest rigging of an Australian market, all of which allegedly took place in Australia.</p><img src="https://counter.theconversation.com/content/66497/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow is affiliated with ACAC (Australian Citizens Against Corruption). </span></em></p>ASIC has been too slow to prosecute those accused of rigging the bank bill swap rate so it doesn’t matter if the government makes the penalties harsher for those found guilty.Andrew Schmulow, Senior Lecturer (1 July 2016 onwards), The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/664862016-10-04T19:11:59Z2016-10-04T19:11:59ZBanks make millions in delaying interest rate cuts<p>When Australia’s central bank moves interest rates as part of its monetary policy, it’s not just <a href="http://www.abc.net.au/news/2013-07-31/jericho-australias-absurd-interest-rates-debate/4854044">politicians who stand to lose</a> if banks don’t follow suit. </p>
<p>Retail lending markets form an integral part of the monetary policy transmission mechanism. If interest rate rises are passed on at a different rate to cuts it can adversely affect the efficacy of expansionary versus contractionary <a href="http://www.rba.gov.au/monetary-policy/">monetary policy.</a></p>
<p>In August 2016, <a href="http://www.apra.gov.au/adi/Publications/Pages/monthly-banking-statistics.aspx">APRA data</a> showed the big four Australian banks held 83% of the home loan market (including both the owner occupier and investment categories). </p>
<p>At an individual level, the ability and willingness of lenders to pass on the official interest rate cuts to borrowers depends on many factors. These include exposure to overseas funding sources, market power, the funding mix, reserves and the extent of securitisation. But it’s also clear delaying interest rate cuts can significantly impact their bottom line.</p>
<hr>
<p><iframe id="tc-infographic-182" class="tc-infographic" height="700" src="https://cdn.theconversation.com/infographics/182/80becb6fdcdd48e78c96eaef6678482563927a65/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>According to my analysis, the big four banks can make approximately $A8.6 million per day as a group if they do not fully pass onto borrowers a hypothetical 0.25% cut in the RBA’s cash rate. </p>
<p>More specifically, if ANZ, CBA, NAB and Westpac manage to postpone lowering their mortgage interest rates say by 10 days, they can potentially make an extra A$16, A$28, A$16 and $A26 million dollars in profits, respectively.</p>
<p>Previous studies on <a href="http://www.sciencedirect.com/science/article/pii/S1042443114000559">mortgages</a>, <a href="http://link.springer.com/article/10.1007/s11187-014-9579-z">small business loans</a> and <a href="http://www.tandfonline.com/doi/abs/10.1080/13547860.2013.803846">credit card interest rates</a> have found significant evidence for the “rockets and feathers” hypothesis. That is, when the cash rate increases, various lending rates shoot up like rockets but when the opposite occurs they go down like feathers.</p>
<p>In my research I used monthly data (2000-2012) for 39 bank and non-bank financial institutions including 7 building societies, 15 Australian-owned banks, 3 foreign subsidiary banks, 13 credit unions, and 1 major mortgage broker. The research found the mortgage interest rate spread of all lenders rose after the 2008 global financial crisis, albeit to varying degrees. </p>
<p>In general, <a href="http://www.sciencedirect.com/science/article/pii/S1042443114000559">the research shows</a> most building societies and some credit unions can offer more competitive home loans than banks.</p>
<p>There is no significant relationship between lenders’ markups and the level of over the counter customer service since the 2008 financial crisis. This is an important observation as the mortgage spreads of larger lenders are typically higher than those of their smaller non-bank counterparts. This puts lie to the view that the relatively higher mortgage interest rates of the larger banks in Australia are justified by higher overhead costs associated with the running of their large branch networks.</p><img src="https://counter.theconversation.com/content/66486/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Abbas Valadkhani does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When the cash rate increases, lending rates shoot up like rockets, but when the opposite occurs they go down like feathers.Abbas Valadkhani, Professor of Economics, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/662642016-10-03T19:16:47Z2016-10-03T19:16:47ZSimpler account switching would help keep our banks honest<p>When the chiefs of Australia’s largest banks appear before the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Four_Major_Banks_Review">Standing Committee on Economics</a> this week it’s likely they’ll be asked about the current level of competition in retail banking.</p>
<p>One of the objectives of competition law in Australia “is to enhance the welfare of Australians through the <a href="http://www.australiancompetitionlaw.org/law/economics/competition.html">promotion of competition</a>”. Promoting competition means making sure there is vibrant competition. This means ensuring that competitiveness is enhanced once competition is established.</p>
<h2>Reluctance to change</h2>
<p>Existing market players generally resist the changes needed to make a sector more competitive. This resistance is driven by the rational fear that a more competitive sector will lead to lower margins and loss of market share. </p>
<p>It seems odd, but in the early days of text messaging it was only possible to send texts to people on the same network. Interconnection of networks was driven partly by commercial opportunity, but mainly by the prospect of regulatory intervention. In mobile telecommunications, mobile number portability was introduced in Australia and elsewhere as a result of similar pressures. </p>
<p>Competition regulators know that competitiveness is higher when it’s easier for a consumer to switch providers. Of course, that does not mean there will be mass switching. Consumers switch when there is a prompt. This might be the end of a contract, or poor (uncompetitive) service from a provider.</p>
<h2>Switching banks</h2>
<p>In Australia, in common with other parts of the world, switching between retail banks presents hurdles. It’s just a difficult process, even with the help of the <a href="https://theconversation.com/how-changing-our-bank-account-numbering-system-will-be-a-win-for-customers-40236">bank to which you are switching</a>. A mixture of direct credits, direct debits, mortgage or rent payments and links to credit cards means that <a href="https://www.businessthink.unsw.edu.au/pages/why-switching-banks-to-get-a-better-deal-is-essential-for-the-economy.aspx/">switching banks is complex and hard</a>. </p>
<p>One solution to this problem is bank account number portability. The idea is that you can switch your bank without changing your bank account number – just like switching mobile providers. </p>
<p>This could be implemented by having a single independent bank account number database (iBAND), which links account numbers with people. Each bank would then check the iBAND when making a payment as depicted below.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=515&fit=crop&dpr=1 600w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=515&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=515&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=647&fit=crop&dpr=1 754w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=647&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=647&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">iBAND.</span>
<span class="attribution"><span class="source">Rob Nicholls</span></span>
</figcaption>
</figure>
<h2>The UK experience</h2>
<p>Even this might be a bit more complicated than is needed. The Australian Payment Clearing Association’s <a href="http://www.apca.com.au/about-payments/future-of-payments/new-payments-platform-phases-1-2">“New Payments Platform”</a> offers a range of identifiers for people in addition to bank account numbers. This could also form the basis for portability and switching.</p>
<p>In the UK, the <a href="http://www.paymentsuk.org.uk/projects/current-account-switch-service">Current Account Switch Service (CASS)</a> is a free-to-use service for consumers to simplify switching current accounts. This service is designed to increase competition, competitive entry and consumer choice. </p>
<p>There is a Current Account Switch Guarantee to enable switching to occur within seven days. Since the scheme started in 2013, there have been <a href="https://www.bacs.co.uk/resources/pages/factsandfigures.aspx">3 million switches and 99% of these occurred within seven days</a>. </p>
<p>The consumer education process that accompanied the introduction of CASS in the UK means more than three-quarters of all current account holders are aware of the service.</p>
<h2>Data can help</h2>
<p>The other issue with switching is knowing whether the deal you will get with the new bank is better. What would be ideal is to have a way of comparing your existing bank or banks and credit card providers with other financial institutions. One way of doing this is by having a standardised form of metadata. </p>
<p>If you wanted to do a comparison, you could download a set of anonymised metadata that described your banking needs. This could then be compared on a platform with other providers. </p>
<p>The UK’s Competition and Markets Authority (CMA), in its <a href="https://www.gov.uk/cma-cases/review-of-banking-for-small-and-medium-sized-businesses-smes-in-the-uk#final-report">final report</a> into the UK retail banking system, suggests that the provision of open banking applications programming interfaces (API) would facilitate such an exchange of data. The broad approach is set out below.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=348&fit=crop&dpr=1 600w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=348&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=348&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=437&fit=crop&dpr=1 754w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=437&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=437&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">CMA approach.</span>
<span class="attribution"><span class="source">Rob Nicholls derived from CMA report</span></span>
</figcaption>
</figure>
<p>The idea is that each bank would present a common interface to external systems through the API. This would allow the banks to create and use apps to enhance the consumer experience. However, it would also allow third parties to be intermediaries or to compare the banks’ offerings.</p>
<h2>Switching, innovation and productivity</h2>
<p>In its <a href="http://competitionpolicyreview.gov.au/files/2014/06/CHOICE.pdf">submissions to the Harper review</a> of competition law and policy, CHOICE argued that such a scheme would encourage innovation. The ACCC put the case that “initiatives to allow consumers to effectively use their information … have the potential to assist consumers to make better choices and drive competition”. </p>
<p>The UK government has put consumer switching at the heart of its approach to increasing productivity. It regards this step as critical to open and competitive markets with the minimum of regulation.</p>
<p>Both the Harper review and the Murray inquiry into the financial system found that competition should be at the forefront of regulatory consideration. One way to improve competitiveness in banking is to facilitate both switching and consumer information. </p>
<p>But perhaps the best way to determine whether there is a need to promote competitiveness would be for the ACCC to commence a market inquiry on retail banking. This could have the aim of developing initiatives to stimulate additional competition.</p><img src="https://counter.theconversation.com/content/66264/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rob Nicholls is a member of the Australian Labor Party.</span></em></p>To boost competition in banking we should give consumers better access to data and account number portability.Rob Nicholls, Lecturer, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/648032016-09-11T20:10:03Z2016-09-11T20:10:03ZA history of failed reform: why Australia needs a banking royal commission<p>The move for an <a href="http://www.smh.com.au/small-business/finance/small-business-ombudsman-kate-carnell-to-run-bank-inquiry-20160831-gr62cq.html">inquiry into how banks treat small business customers</a> should not overshadow the ongoing call for a broader royal commission on banks. </p>
<p>Several financial inquries (outlined below) have failed to tackle the growing concentration in the Australian finance sector, or the need to separate general banking from investment banking as the reform process in the United States, UK and Europe is contemplating.</p>
<p>Calls for a royal commission are also underpinned by ongoing reports of misconduct within the banks, summarised in a timeline of bad behaviour below.</p>
<p>Every other major industrial country is at an advanced stage in bank reform, and Australia would be isolated if it did not engage in a similar substantial and structural reform process.</p>
<hr>
<h2>Financial reform in Australia</h2>
<p><strong>1997 Wallis Inquiry</strong> </p>
<p><a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/RP9697/97rp16">This inquiry</a> has been associated with the “four pillars” policy towards bank mergers (though the inquiry itself did not propose this), and the opposition to any merger between ANZ, CBA, NAB and Westpac. The unwritten policy originated in Paul Keating’s reservations on concentration in the industry. It also led to the CLERP financial reforms announced on fund raising, disclosure, financial reporting and takeovers. </p>
<p><strong>2009 Future of Financial Advice Inquiry</strong> </p>
<p>This inquiry stemmed from industry failures, such as Storm Financial and Opes Prime, and explored the role of financial advisers and the general regulatory environment for these products and services. It resulted in the <a href="https://www.cpaaustralia.com.au/professional-resources/financial-planning/policy-and-research/future-of-financial-advice-reforms">Corporations Amendment (Future of Financial Advice) Act 2012</a> by the Labor government to tackle conflicts of interest within the financial planning industry. This was subsequently amended by the Liberal government in the <a href="http://www.charteredaccountants.com.au/Industry-Topics/Financial-advisory-services/FoFA">Corporations Amendment (Financial Advice Measures) Act March 2016</a> which softened some of the reforms.</p>
<p><strong>2012 Cooper Inquiry</strong> </p>
<p>This was <a href="http://strongersuper.treasury.gov.au/content/publications/government_response/downloads/Stronger_Super.pdf">a review</a> into the governance, efficiency, structure and operation of Australia’s superannuation system. It examined measures to remove unnecessary costs and better safeguard retirement savings, claimed fees in superannuation were too high, and that choice of fund in superannuation had failed to deliver a competitive market that reduced costs.</p>
<p><strong>2014 Parliamentary Joint Committee on Corporations and Financial Services
Inquiry</strong> </p>
<p><a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Financial_Adviser_Qualifications/Report">This inquiry</a> included proposals to lift the professional, ethical and education standards in the financial services industry. It aimed to clarify who could provide financial advice and to improve the qualifications and competence of financial advisers; including enhancing professional standards and ethics.</p>
<p><strong>2015 Murray Inquiry</strong> </p>
<p><a href="http://fsi.gov.au/">This inquiry</a> was intended to provide “a ‘blueprint’ for the financial system over the next decade,” but fell somewhat short of this in not critically addressing the concentration or restructuring of the main banks. While acknowledging the high concentration and vertical integration of Australia’s banking industry the inquiry’s approach to encouraging competition was to seek to remove impediments to its development. The inquiry aimed to increase the resilience to failure with high bank capital ratios, and to reduce the costs of failure, including by ensuring authorised deposit-taking institutions maintained sufficient loss absorbing and recapitalisation capacity to allow effective resolution with limited risk to taxpayer funds.</p>
<hr>
<p>In contrast to the limitations of the Australian reform process, more ambitious reform of the banking sector is being actively considered in the rest of the advanced economies. This is because of widespread international concerns regarding bank monitoring and standards, and the continuing threat of systemic risk and failure.</p>
<p>The objective is to create more effective competition, greater choice, improved governance, more balanced incentives, and responsible behaviour and performance. Central to international reform proposals is the intention of:</p>
<ul>
<li><p>shielding commercial banks from losses incurred by speculative investment banking</p></li>
<li><p>preventing the use of public subsidies (eg central bank lending facilities and deposit guarantee schemes) from supporting risk taking</p></li>
<li><p>reducing the complexity and scale of banking organisations</p></li>
<li><p>making banks easier to manage and more transparent</p></li>
<li><p>preventing aggressive investment bank risk cultures from infecting traditional banking;</p></li>
<li><p>reducing the scope for conflicts of interest within banks</p></li>
<li><p>reducing the risk of regulatory capture and taxpayers exposure to bank losses.</p></li>
</ul>
<p>Among the ongoing international initiatives to reform the banks are the <a href="https://www.gov.uk/government/news/banking-reform-act-becomes-law">UK Banking Reform Act</a>, which includes ring fencing retail utility banking from investment banking, due for implementation in 2019.</p>
<p>In the US, the <a href="http://www.warren.senate.gov/files/documents/Fact%20Sheet%20-%2021st%20Century%20Glass-Steagall.pdf">21st Century Glass Steagall Act</a>, proposed by Elizabeth Warren and supported by Democratic nominee Hillary Clinton, involves separating traditional banks that offer savings and checking accounts from riskier financial services such as investment banking and insurance. </p>
<p>In Europe, <a href="http://europeanmemoranda.cabinetoffice.gov.uk/files/2014/03/6860-13_.pdf">the Liikanen Plan</a>, announced in 2012, proposes investment banking activities of universal banks be placed in separate entities from the rest of the group. This has already been taken up widely throughout the European banking sector. </p>
<h2>A licence to operate?</h2>
<p>The banks have experienced continuous systemic risk (partly of their own making), erosion of their integrity, and a loss of public trust.</p>
<p>The Australian banks are on notice that they need to renew their licence to operate, to reconnect with their sense of duty and the Australian people, and to reconfirm their responsibilities to the Australian economy. This will occur, even if it takes a royal commission to achieve it.</p>
<hr>
<h2>A timeline of banks behaving badly</h2>
<iframe src="https://cdn.knightlab.com/libs/timeline3/latest/embed/index.html?source=16t5cJvvQqZqnJPl1M9C1t8fNOveF64OxTxKoPDZHJLc&font=Default&lang=en&initial_zoom=2&height=650" width="100%" height="650" frameborder="0"></iframe>
<p><strong>January 2004: NAB foreign currency options trading</strong></p>
<p>NAB announces losses of A$360 million due to unauthorised foreign currency trading activities by four employees who concealed the losses. <a href="http://www.apra.gov.au/MediaReleases/Pages/04_09.aspx">Bank risk policies</a> and trading desk supervision prove ineffective. NAB sacks or forces the resignation of eight senior staff, disciplines or moves 17 others and restructures its board of directors. Four traders, including the head of the foreign currency options desk, are subsequently prosecuted and jailed.</p>
<p><strong>2008: global financial crisis takes down Opes Prime, Storm Financial, Allco and Babcock and Brown</strong></p>
<p>The market capitalisation of the stock markets of the world peaks at US$62 trillion at the end of 2007. By October 2008 the market is in free fall, having lost US$33 trillion dollars, over half of its value in 12 months of unrelenting financial and corporate failure. Originating in the toxic sub-prime securities of the New York investment banks, the <a href="http://cpe.oxfordjournals.org/content/early/2010/04/27/cpe.bzq002.abstract">financial crisis</a> threatens to engulf the economies of the world. </p>
<p>The mythology today is that Australia miraculously escaped the global financial crisis due to the resilience of its regulatory system and the governance and risk management of its banks. The reality is that more than a dozen significant Australian companies went under during the crises (amounting to losses in excess of $60 billion in total). In almost every case at least one of the big four banks were involved in supporting the business models and extending credit to very doubtful enterprises.</p>
<p><strong>July 2012: HSBC money laundering</strong></p>
<p>A US Senate Inquiry discovers that <a href="https://www.icij.org/project/swiss-leaks/banking-giant-hsbc-sheltered-murky-cash-linked-dictators-and-arms-dealers">HSBC</a> allowed Latin American drug cartels to launder hundreds of millions of ill-gotten dollars through its US operations, rendering the dirty money usable. The HSBC Swiss private banking arm profited from doing business with arms dealers and bag men for third world dictators and other criminals. </p>
<p>HSBC agrees to pay a fine in excess of US$2 billion to settle US civil and criminal actions. In 2016 it is revealed that UK Chancellor George Osborne intervened to prevent criminal charges against HSBC as this might have undermined financial markets.</p>
<p><strong>2013: Libor rigging</strong></p>
<p><a href="https://books.google.com.au/books?id=3ZDqAwAAQBAJ&pg=PT165&lpg=PT165&dq=Libor+Justin+O%27Brien&source=bl&ots=cSYzB8ljps&sig=KYP1D9d_xxpEx3owc7EpKBEPlKs&hl=en&sa=X&ved=0ahUKEwjZ06yM0P7OAhWCHpQKHaMJAkYQ6AEIOjAG#v=onepage&q=Libor%20Justin%20O'Brien&f=false">Libor</a> is the international vehicle for settling inter-bank interest rates, and covers markets worth US$350 trillion. </p>
<p>In 2012 it’s revealed that wholesale fraudulent manipulation of the rates has been occurring for years, and throughout the reform process following the global financial crisis. The crisis engulfs many international banks including Barclays, Citigroup, Deutsche Bank and JP Morgan. The irony of the scandal is that Libor was intended as a measure of the state of health of the banking system. </p>
<p>The US Commodity Futures Trading Commission and US Department of Justice impose fines totalling hundreds of millions of dollars on the international banks. In Australia ASIC investigates the role of ANZ, BNP, UBS, and RBS and imposes fines. In 2014 the administration of Libor is transferred to the Euronext NYSE.</p>
<p><strong>2014: Commonwealth Bank financial planning scandal</strong></p>
<p>An <a href="http://www.abc.net.au/4corners/stories/2014/05/05/3995954.htm">ABC Four Corners report</a> reveals CBA customers have lost hundreds of millions of dollars after the bank’s financial advisers recommend speculative investments. </p>
<p>The report describes the sales-driven culture inside the Commonwealth Bank’s financial planning division, with a focus on profit at all cost and a culture that has been built on commissions. The bank is found to have misled potentially thousands of clients. </p>
<p>The bank sets up an internal inquiry and compensation (though is subsequently accused of dragging its feet on compensation). A Senate inquiry into the performance of ASIC during the affair recommends establishing a Royal Commission to examine the banks.</p>
<p><strong>May 2015: Forex manipulation</strong></p>
<p>Following the Libor scandal, it is discovered that traders have been deliberately orchestrating trades in the $US5.3 trillion-per-day global foreign exchange market to their own advantage.</p>
<p>“They acted as partners - rather than competitors - in an effort to push the exchange rate in directions favourable to their banks but detrimental to many others,” says US Attorney-General Loretta Lynch. “And their actions inflated the banks’ profits while harming countless consumers, investors and institutions around the globe.”</p>
<p>US and British regulators <a href="http://www.abc.net.au/news/2015-05-21/us-britain-fine-top-banks-nearly-6-bn-for-forex-libor-abuses/6485510">fine Barclays, Citigroup, JP Morgan, RBS, UBS, and Bank of America more than US$6 billion</a> in recognition of the scale and duration of the fraud.</p>
<p><strong>March 2016: ASIC targets ANZ for rigging the bank bill swap rate (BBSW)</strong></p>
<p><a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-060mr-asic-commences-civil-penalty-proceedings-against-anz-for-bbsw-conduct/">ASIC commences legal proceedings against ANZ</a> for unconscionable conduct and market manipulation in relation to the bank’s involvement in setting the bank bill swap reference rate (BBSW) in the period March 2010 to May 2012. It foloows up with actions against NAB and Westpac.</p>
<p>The BBSW is the primary interest rate benchmark used in Australian financial markets, administered by the Australian Financial Markets Association (AFMA). It is alleged the banks traded in a manner intended to create an artificial price for bank bills.</p>
<p><strong>March 2016: CommInsure payments scandal</strong></p>
<p>The insurance arm of the Commonwealth Bank c<a href="http://www.abc.net.au/4corners/stories/2016/03/07/4417757.htm">omes under media scrutiny</a> for operating along similar lines to the earlier financial planning business. </p>
<p>A company whistleblower reveals the measures the bank is taking to avoid making insurance payouts to policyholders, many of whom are sick or dying.</p><img src="https://counter.theconversation.com/content/64803/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thomas Clarke does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The universal reform of the banking system will take more than another inquiry.Thomas Clarke, Professor, UTS Business, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/633962016-09-09T03:31:44Z2016-09-09T03:31:44ZCompany results wrap: weighing up the risks behind the profits of Australia’s big four banks<p><em>Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing. In our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a> we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play</em></p>
<hr>
<p>The biggest Australian banks are fairing well in a year of increased pressure to reform from politicians, international events like the Britain’s exit from the European Union and more regulation from the Australian Prudential Regulation Authority (APRA).</p>
<p>A number of interrelated factors have contributed to the relatively strong performance of the Australian banks. For instance, the banks have limited exposure to the types of securities which led to massive losses for their counterparts in other countries. The banks also heavily rely on domestic loans, particularly the low risk household sector, so better lending standards and a proactive approach to prudential supervision by APRA may have contributed.</p>
<p>The <a href="http://www.bis.org/bcbs/basel3.htm">Basel III regulatory requirements</a>, brought in after the 2008 financial crisis, emphasise holding an increased amount of subordinated debt, as a measure of market discipline. However all the big four banks are holding less and less subordinated borrowings. More specifically, it declined by more than 50% from 2007 to 2014, according to our calculations. </p>
<p>APRA limits banks’ holdings of higher risk securitised assets, these are loans packaged into securities, to a maximum of 25% of the banks’ loan portfolio. These are high risk if not properly understood or defined, as happened with United States home loans, blamed for the start of the global financial crisis.</p>
<p>When Australian banks calculate bank capital requirements, they need to fully account for securitised assets. This is a rule from APRA that goes beyond international standards, to reflect the risk inherent in these products. </p>
<p>Inter-bank liquidity tightened significantly with all banks increasing their holdings of <a href="http://www.rba.gov.au/media-releases/1999/mr-99-02-role.html">Exchange Settlements Accounts at the Reserve Bank</a>, this a form of low risk liquidity. Australian banks have lower interbank deposits compared to their Europe and USA counterparts and are also heavily involved in long term wholesale funding and are required to hold more liquid assets including government debt to deal with liquidity. All of this makes Australian banks less risky in times of crisis because spillover effects from other banks are less likely.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1251&fit=crop&dpr=1 600w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1251&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1251&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1573&fit=crop&dpr=1 754w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1573&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1573&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The big four.</span>
<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>There has been a significant increase in concentration in the Australian banking industry since the global financial crisis. For example with Westpac and the Commonwealth Bank of Australia taking over St. George Bank and Bank West, respectively.</p>
<p>Following mergers, the big four account for 88% of the Australian banking system assets. This reinforces the idea that the banks are <a href="http://www.afr.com/business/banking-and-finance/financial-services/too-big-to-fail-is-alive-and-well-20151025-gkhvpq">“too big to fail”</a>. </p>
<p>The banks have also moved to more fee generating activities, which increases risk, but to a lesser extent in Australian banks. Data shows between 1998 and 2014, on average, 1.2% greater interest income was generated relative to non-interest income for Australian banks, according to our analysis. However, there is also similar evidence for the top eight publicly-listed Canadian banks. They exhibit on an average, a 2.5% increase in net interest revenue relative to non-interest income over the same time period. </p>
<p>This reinforces that Australian and Canadian banks demonstrated extra ordinary resilience during the credit turmoil in the global financial crisis. The World Economic Forum in 2008 reported that Australia and Canada were among <a href="http://www.reuters.com/article/us-financial-soundest-banks-idUSTRE4981X220081009">the top four safest banking systems in the world</a>. </p>
<p>Large banks in Australia are active in international markets through direct ownership of foreign based banks and having offshore operations as a source of capital. Deregulation of banking in countries such as the USA, Canada, Australia and many developing countries has opened up new markets for foreign banks. Australian banks’ largest international exposure is to New Zealand, where all big four banks retain sizeable operations. </p>
<p>Although the growing interdependence among international economies and financial markets is certain to continue, the impact of Brexit on Australian banks remains minimal. It remains to be seen in the long-run how Australian banks will weather the international banking/economic developments.</p>
<p>As a last measure of the bank health, we can measure the domestic systemic risk with <a href="http://onlinelibrary.wiley.com.ezproxy.library.uq.edu.au/doi/10.1111/j.1467-8462.2013.12008.x/abstract">a methodology</a> based on <a href="http://www.bis.org/publ/bcbs255.htm">one used by the official Basel Committee on Banking Supervision</a>. Based on July 2016 monthly data, the big four banks account for 80.38% of the systemic risk in the financial system and the riskiest, from highest to lowest, are the National Australia Bank, the Commonwealth Bank of Australia, Westpac and ANZ.</p><img src="https://counter.theconversation.com/content/63396/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mamiza Haq receives funding from Australian Research Council. </span></em></p><p class="fine-print"><em><span>Necmi K Avkiran does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s big four banks are managing risk well, this could be contributing to their strong performance.Mamiza Haq, Lecturer in Finance, The University of QueenslandNecmi K Avkiran, Associate Professor in Banking and Finance, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/575552016-04-13T01:09:10Z2016-04-13T01:09:10ZRoyal commission into banking debate reveals the sell-off of Australian democracy<figure><img src="https://images.theconversation.com/files/118443/original/image-20160412-15858-1i73go8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Malcolm Turnbull has downplayed calls for a royal commission into the banks, arguing that their operations are already well governed.</span> <span class="attribution"><span class="source">AAP/Richard Wainwright</span></span></figcaption></figure><p>Debates over the call for a royal commission into the banking industry have brought to the fore the real battle in Australian politics – and it’s not about partisan rivalry. </p>
<p>At stake is whether Australia is committed to being a democracy ruled by the people as represented by government, or a <a href="https://independentaustralia.net/politics/politics-display/coming-the-age-of-australian-corporatocracy,7953">corporatocracy</a> where government is the political arm of big business. </p>
<p>When Tony <a href="http://www.theaustralian.com.au/national-affairs/election-2013/abbott-claims-victory-and-says-australia-is-open-for-business/story-fn9qr68y-1226714414009">“open for business”</a> Abbott was running the show it was about the state kowtowing to the market. Remarkably, his successor as prime minister, Malcolm Turnbull, has moved to a whole new level. Businesses and political interests are now being treated as one and the same. Democracy is at stake.</p>
<h2>Smoke and fire</h2>
<p>Australia has suffered a raft of scandals at the hands of its major banks. Headline news is dominated by stories of blatant <a href="http://www.abc.net.au/news/2016-03-07/comminsure-scandal-whos-who-four-corners/7226576">insurance fraud</a>, high-level <a href="http://www.abc.net.au/news/2016-03-04/asic-takes-action-against-anz-for-alleged-rate-fixing/7221306">rate fixing</a>, and dodgy <a href="http://www.abc.net.au/news/2015-10-28/cba-denying-compensation-to-victims-of-financial-planning/6892624">financial planning</a>. When it’s not downright criminal it is conscience-free profiteering</p>
<p>ANZ boss Shayne Elliot fears that a royal commission will spook international investors; that they will think that <a href="http://www.abc.net.au/news/2016-04-09/nab-anz-bosses-say-banking-royal-commission-a-distraction/7313030">“where there is smoke there is fire”</a>. Given the overwhelming evidence that fires have been raging out of control in the banking sector, such a response beggars belief. </p>
<p>Westpac chimed in with its view that a royal commission could <a href="http://www.abc.net.au/news/2016-04-09/nab-anz-bosses-say-banking-royal-commission-a-distraction/7313030">“impact confidence in the economy”</a>. There is a warped logic at play. Why should we avoid holding corporations to account for clear evidence of wrongdoing? Because it’s bad for business. </p>
<h2>Banking on culture</h2>
<p>The scandals reflect a culture in banking and finance that runs on greed and is backed up by blatant disregard for any form of public responsibility. </p>
<p>Commonwealth Bank chief executive Ian Narev <a href="http://www.smh.com.au/business/intelligent-investor/comminsure-is-cba-an-unethical-stock-20160308-gndfje.html">promises</a> that all will be well because he and his managers are determined to build a culture:</p>
<blockquote>
<p>… with the customer at the centre of what we do.</p>
</blockquote>
<p>ANZ sings from the same songsheet with its explicit commitment to <a href="http://www.afr.com/business/banking-and-finance/inside-anzs-toxic-culture-the-highoctane-world-of-dealing-rooms-20160114-gm5mk6">“culture, ethics and fairness”</a>.</p>
<p>The scandals that have prompted calls for a royal commission tell us something completely different. Despite the fairytale corporate cultures claimed by the banks, the real cultures are ones that value transferring as much wealth as possible from the customer’s pockets into their own.</p>
<p>While Opposition Leader Bill Shorten may have committed to a royal commission if his party is elected, this debate is not driven by left-wing bank-bashing. The call has been backed by <a href="http://www.moneymanagement.com.au/news/financial-planning/isa-backs-royal-commission-banks">Industry Super Australia</a> and by MPs <a href="http://www.skynews.com.au/news/top-stories/2016/04/11/support-within-coalition-for-bank-commission.html">across the political spectrum</a>. Shorten’s announcement was also preceded by the <a href="http://www.smh.com.au/business/banking-and-finance/asa-calls-for-royal-commission-in-wake-of-comminsure-scandal-20160310-gnfbtn.html">Australian Shareholders’ Association’s</a> demands for the insurance industry to be put under the same scrutiny. </p>
<h2>Turnbull and the bankers</h2>
<p>When it comes to the mooted royal commission, Turnbull – a former banker himself – downplays the problem. For him the scandals do not amount to a fundamental crisis in the system, just a few <a href="http://www.abc.net.au/news/2016-04-07/backbencher-joins-calls-for-banking-royal-commission/7308036">“troubling incidents”</a> that can be tackled in the existing order. </p>
<p>This echoes the banks’ own responses. They adamantly claim that a business-as-usual approach is the best and that additional scrutiny is unnecessary. NAB boss Andrew Thorburn has condemned the debate as a <a href="http://www.smh.com.au/business/banking-and-finance/nabs-andrew-thorburn-says-royal-commission-would-be-a-serious-distraction-20160408-go1rwd.html">“serious distraction”</a> from his bank’s commitment to “help their customers”.</p>
<p>What unites Turnbull and the bankers is not just about side-stepping public scrutiny. It is about the fundamental political role of the Australian people. Narev might claim a deep commitment to Commonwealth Bank <a href="https://www.commbank.com.au/about-us/news/media-releases/2016/ian-narev-ceo-statement-on-life-insurance.html">“being an ethical business”</a>, but he only does so <a href="http://www.theage.com.au/comment/the-age-editorial/comminsure-pitches--people-against-profit-20160308-gndmz9.html">because</a>:</p>
<blockquote>
<p>… satisfied customers are good for shareholders as well.</p>
</blockquote>
<p>Some may say Turnbull gave the banks a <a href="https://theconversation.com/banks-get-a-bollocking-from-turnbull-on-ethics-57350">dressing down</a> when he spoke at Westpac’s 199th birthday lunch recently, but only because they didn’t “put their customers’ interests first”. Ultimately he put his faith in the bank bosses’ ability to instil the ethical standards required. </p>
<h2>Customers or citizens?</h2>
<p>The politics that Turnbull and the bank chiefs support is one where people are robbed of citizenship. We are reduced to being economic functionaries in a world ruled by corporations. This is a world where vacuous corporate claims to self-governance through ethics and culture replace public accountability. </p>
<p>Turnbull <a href="http://www.businessinsider.com.au/malcolm-turnbull-election-transitioning-economy-2016-4">has committed</a> to fighting the upcoming election on what he defines as a single issue:</p>
<blockquote>
<p>… whether we complete our transition to the new economy or we allow Labor to kill off that opportunity.</p>
</blockquote>
<p>In pursuing this, Turnbull joins the banks in championing a politics that is entirely subservient to economic imperatives.</p>
<p>No talk here of justice, freedom, equality, participation or representation for the nation’s citizens. The only thing <a href="http://www.businessinsider.com.au/malcolm-turnbull-election-transitioning-economy-2016-4">we are told</a> to care about is delivering “our children and grandchildren the great jobs they deserve”. </p>
<p>No-one can deny that jobs are important. But rendering them as the only serious political issue defies democracy. </p>
<h2>Beyond the royal commission</h2>
<p>Turnbull’s political imagination is limited in that it construes people only as being defined in terms of markets. No more citizens, just customers in a consumer market, workers in a labour market, and investors in a financial market. The ultimate beneficiaries? The corporations who want to rule the world.</p>
<p>Time will tell if a royal commission into banking eventuates. Regardless, if the current trend continues we will keep suffering scandal after scandal. But the debate raging over the past week speaks to a much more significant challenge for Australian politics. </p>
<p>The question we need to ask is not just whether we need a royal commission, but whether or not it is too late to turn the tide of corporate rule.</p><img src="https://counter.theconversation.com/content/57555/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carl Rhodes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The politics that Malcolm Turnbull and the big banks support is one in which people are robbed of their citizenship and reduced to economic functionaries.Carl Rhodes, Professor of Organization Studies, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/562892016-03-17T19:20:24Z2016-03-17T19:20:24Z‘Command and control’ banks have got ethics and culture all wrong<figure><img src="https://images.theconversation.com/files/115365/original/image-20160316-30211-1plxyj0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Banks must accept they can't control the values, beliefs and behaviours of their employees.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>The <a href="https://theconversation.com/comminsure-case-shows-its-time-to-target-reckless-misconduct-in-banking-55748">latest scandal</a> engulfing Australia’s biggest bank has reverberated through the industry with NAB and the ANZ Bank instigating <a href="http://www.smh.com.au/business/banking-and-finance/asic-orders-independent-review-of-anzs-insurance-and-super-arm-onepath-20160315-gnj7hd.html">reviews of their life insurance businesses</a>. </p>
<p>Earlier this year ANZ was charged with <a href="http://www.smh.com.au/business/banking-and-finance/asic-sues-anz-for-rate-rigging-20160303-gna7gg.html">fixing its bank bill swap rate</a>. <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/15-060mr-asic-commences-civil-penalty-proceedings-against-anz-for-bbsw-conduct/">ASIC</a> called it “unconscionable conduct and market manipulation”. </p>
<p>Westpac has been implicated as well. It is understood ASIC has identified <a href="http://www.businessspectator.com.au/news/2016/3/8/industries/westpac-execs-rate-rig-probe">120 of its employees as “persons on interest”</a> in its investigations of rate rigging. </p>
<p>Things are getting so bad that Senator <a href="http://peter-whish-wilson.greensmps.org.au/">Peter Whish-Wilson</a> quipped that the banks “should be handing out a scandal of the month award”.</p>
<h2>A cultural solution?</h2>
<p>Bank bosses have responded by repeating an old and tired refrain about corporate culture and ethics. </p>
<p>Soon after Shayne Elliot took on the job as ANZ’s CEO last October he announced that the “core purpose” and culture of the bank were his priorities. </p>
<p>This year ANZ has been accused of having a “<a href="http://www.afr.com/business/banking-and-finance/anz-boss-shayne-elliott-draws-up-plan-to-fix-toxic-culture-20160116-gm7953">toxic culture</a>”, especially amongst its traders, alleged to have enjoyed a life of <a href="http://www.afr.com/business/banking-and-finance/inside-anzs-toxic-culture-the-highoctane-world-of-dealing-rooms-20160114-gm5mk6">lap-dancing, drugs, booze, and enormous bonuses</a>. </p>
<p>ANZ’s response? “We want to be known as a bank with a strong focus on culture, ethics and fairness,” said chief risk officer <a href="http://www.afr.com/business/banking-and-finance/inside-anzs-toxic-culture-the-highoctane-world-of-dealing-rooms-20160114-gm5mk6">Nigel Williams</a>.</p>
<p>CBA is no different. Chairman David Turner promised last year that his <a href="http://www.smh.com.au/business/banking-and-finance/cba-wants-to-be-the-ethical-bank-20151117-gl11rc.html">“will be the ethical bank, the bank others look up to for honesty, transparency, decency, good management, openness”.</a></p>
<p>With the CommInsure debacle CBA’s CEO <a href="http://www.smh.com.au/business/intelligent-investor/comminsure-is-cba-an-unethical-stock-20160308-gndfje.html">Ian Narev defended his organisation</a> saying “the culture that we’re building throughout the Commonwealth Bank […] is one with the customer at the centre of what we do”. </p>
<h2>Getting ethics wrong</h2>
<p>Bosses respond to scandals by saying they can make everything right by increasing their levels of control. Control, that is, over the values, beliefs and behaviours of their employees.</p>
<p>The basic mistake is to assume that ethics is about one group of people (managers) dictating ethics to another group of people (employees). This is not about individual employees making choices for which they are responsible. It is about them doing what they are told.</p>
<p>This completely fails to acknowledge that the reason debates over ethics in banking are occurring is because of people who have criticised dominant corporate norms, not done what the corporation expected of them, and had the courage to bring them to public attention. </p>
<p>The ethical breaches at CommInsure would not have come to light if it wasn’t for its former chief medical officer, <a href="http://www.abc.net.au/news/2016-03-09/comminsure-whistleblower-suing-for-wrongful-dismissal/7234064">Dr. Benjamin Koh</a>, being prepared to defy the corporation’s culture by blowing the whistle. </p>
<p>Was ANZ being held to account for rate fixing as result of it own cultural commitment to ethics? No, it came out of an investigation by the regulator ASIC. </p>
<h2>No room for criticism</h2>
<p>While the banks claim to want ethical cultures, in practice they are in the business of curtailing the very forms of critical questioning that allow ethical issues to be surfaced in the first place. </p>
<p>One might well wonder whether the banks are serious about taking ethical responsibility for their actions, or whether this talk of culture is just trying to minimise damage after the event?</p>
<p>How did CBA respond when, last October, former employee <a href="http://parlinfo.aph.gov.au/parlInfo/download/committees/commsen/bfbb3815-8ae8-4bf9-b983-5c1aae87054d/toc_pdf/Economics%20References%20Committee_2015_10_28_3952.pdf;fileType=application%2Fpdf#search=%22committees/commsen/bfbb3815-8ae8-4bf9-b983-5c1aae87054d/0000%22">Russell Phillips</a> described how the bank was actively working to minimise compensation paid to victims of its financial planning scam? </p>
<p><a href="http://www.ifa.com.au/news/15320-cba-makes-second-defence-against-comp-scheme-scandal">Annabel Spring</a>, group executive of wealth management, mounted something of a character assassination of the whistle blower. She asserted that his testimony was misleading, implying he was an unreliable witness. </p>
<p>When it came to the rate fixing investigation, ASIC referred to the ANZ’s behaviour as “<a href="http://www.afr.com/business/banking-and-finance/anz-named-as-one-of-the-appalling-banks-in-ratefixing-probe-20150603-ghg0sz">absolutely appalling</a>”. The bank was said to have been highly defensive and “obstructionist” as it sought to frustrate inquiries. </p>
<h2>Holding the banks to account</h2>
<p>The litany of scandals that have plagued the Australian financial services sector exemplify how corporations have been publicly held to account for their actions, and pressured to accept responsibility. </p>
<p>This is not an ethical responsibility the banks have taken on voluntarily through their “ethical cultures”. Responsibility was thrust upon them as a result of the actions of citizens, employees, regulators, and journalists. </p>
<p>If it wasn’t for them, the scandals would remain covered up. This shows that if we want corporations to be ethically accountable, then their conduct and behaviour needs to be open to scrutiny. Forced open where necessary. </p>
<p>Recent events show that the last place such scrutiny is likely to arise is within the banks themselves. Cultural control, as the proposed highroad to ethics, is an ivory tower fantasy that bears no correlation to how ethics is, in practice, brought to bear on corporate activity. </p>
<p>If the banks want to contribute to ethical practice they need to let go of this control, and be open to criticism, welcoming of debate, and vulnerable to dissent. </p>
<p>At present there is no sign that they are willing or able to do this.</p><img src="https://counter.theconversation.com/content/56289/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carl Rhodes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Banks may pay lip service to ethical cultures but often curtail the critical questioning that allows ethical issues to be surfaced in the first place.Carl Rhodes, Professor of Organization Studies, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/556272016-03-13T19:16:42Z2016-03-13T19:16:42ZBanking outlook: threats from technology, burst of housing bubble, end of mining boom<p><em>It’s reporting season, and over the past few weeks some of Australia’s biggest companies have been releasing information on how they’re travelling. These reports reflect key themes of how things are going in key sectors of the economy. Over coming days we’re going to report on the results a handful of major companies in key sectors, transport, construction, retail, mining, insurance and banking. Today we look at the banking sector.</em></p>
<hr>
<p>The Australian banking industry is a classic economic <a href="http://www.economicsonline.co.uk/Business_economics/Oligopoly.html">‘oligopoly’</a> with the so-called ‘Four Pillars’ or ‘Big Four’ (National Australia Bank (NAB), Commonwealth Bank of Australia (CBA), ANZ and Westpac) dominating not only the banking sector but the whole financial sector and arguably the economy. </p>
<p>The big four banks account for over 25% of the market capitalisation of the ASX 200, and are valued at over $360 billion. In total, the four banks reported assets in 2015 of some $3.5 trillion or about 10 times the size of BHP and RIO combined, and profits for their latest financial year of over $30 billion between them.</p>
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<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<h2>The risks in Australia’s banking system</h2>
<p>In an oligopoly, the dominant players operate a very similar business model. This is true of the Big Four, which operate within a structure known as ‘universal banking’. Not only do each of these behemoths run a traditional retail and business bank, they also have wealth management (mainly retail superannuation fund management) and insurance subsidiaries. To complete the picture, each of the four runs a wholly owned bank in New Zealand, again dominating the banking system in that country. The banks operate throughout Australasia, often with competing branches (and valuable jobs) in each small town - Australia is <a href="https://theconversation.com/murray-inquiry-not-made-for-a-future-with-fewer-banks-35244">‘over banked’</a>.</p>
<p>The risks of having one of the <a href="https://www.imf.org/external/pubs/cat/longres.aspx?sk=40107.0">most concentrated banking systems</a> in the world were outlined in 2012 by the International Monetary Fund (IMF), it warned that Australia’s banks had: </p>
<blockquote>
<p>“broadly similar business models and reliance on offshore funding leave them exposed to common shocks and disruptions to funding markets. Against a still worrying global environment, these risks will need to be closely monitored, particularly if the domestic economy slows sharply.”</p>
</blockquote>
<p>Among the four banks, there is constant jockeying for prominence and any one time one bank climbs to the top of the pile. At the moment, the clear winner is CBA, largest by capitalisation, latest annual profits and staff employed with the lowest Cost to Income Ratio (CIR). Another winner is Westpac, the smallest by assets and employees but with an enviable CIR and Net Interest Margin (NIM) leading to excellent profit results. Meanwhile, NAB trails the others by profitability and with a low NIM and high CIR, will be likely do so for some time. Nonetheless, NAB is by any standards a very profitable company, if a bit overshadowed by the other banks this year.</p>
<p>It should be noted that not all banks report their financial results at the same time in a completely consistent fashion. However each quarter the banks are required to report their risk numbers to the Australian Prudential Regulation Authority (APRA), the banking regulator. These so-called <a href="http://www.apra.gov.au/adi/Documents/150507-APS-330-Public-Disclosure.pdf">APS 330 reports</a> give a picture (albeit slightly murky) of where banks are taking risks and the size of those risks. </p>
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<p>These numbers show that the banks hold roughly similar amounts of assets, so-called Risk Weighted Assets (RWA) and associated capital. Although Westpac, being slightly smaller, has about 10% less of each. This data shows Big Four banks are still predominantly lending institutions with about 86% of their Risk Weighted Assets (RWAs) related to credit. </p>
<p>While ANZ has a higher proportion of corporate and business lending than the others, about 23% of its credit (RWAs) relates to retail, mainly residential mortgage, lending. With a few notable exceptions, such as CBAs exposure to interest rate risks and NAB’s operational risks, the risk numbers are similar across the banks.</p>
<p>From an analysis of prior APS 330 reports (not shown), it appears that, although the RWAs for residential mortgages have increased slightly for all banks (mainly because lending has increased), the banking sector has not factored in much additional capital to cover the potential for the busting of a housing bubble. </p>
<p>The large Australian banks will in the next year face headwinds from a number of directions. First, any busting or even deflation of Australia’s <a href="http://www.domain.com.au/news/doomsday-theorists-morbid-obsession-with-australian-property-20160225-gn3173/">real or imagined housing bubble</a> will undoubtedly give the banks serious headaches. </p>
<p>Likewise, the end of the mining boom is already beginning to take its toll on mining companies, even the <a href="http://www.abc.net.au/news/2016-02-23/bhp-billiton-posts-multi-billion-dollar-loss/7191412">largest</a>. If the gloom spreads, loans to the sector might be under pressure. Last, but far from least, banking scandals will definitely come to the fore this year especially <a href="https://theconversation.com/asic-finally-pulls-the-bbsw-trigger-on-anz-55766">market manipulation</a> and <a href="http://www.theage.com.au/interactive/2016/comminsure-exposed/heart-attack/">product misselling</a>. </p>
<h2>Disruption from technology</h2>
<p>Following the retreats of both NAB and ANZ from their respective <a href="https://theconversation.com/national-australia-bank-30-years-of-strategy-failure-55159">overseas forays</a>, it looks like the four banks are going to resemble each other even more as they are all embarking on strategies that target the same Australasian retail, mortgage and business markets. But there is at least one significant point of difference between the banks that might give a clue to potential shifts in future.</p>
<p>In banking, as in other industries, technology is critical. After an outsourcing deal that went <a href="http://www.cio.com.au/article/341677/outsourcing_multi-billion-dollar_mega_deals_end_breakup/">sour</a>, in 2008 the CBA board was forced (some say was brave enough) to embark on a complete refresh of its ageing IT systems, often called a Core Systems Replacement (CSR). </p>
<p>After some significant <a href="http://www.theaustralian.com.au/business/technology/csc-questions-cba-core-banking-upgrade/story-e6frgakx-1226089681155">project blowouts</a>, CBA eventually got the CSR to work and their annual profit numbers are beginning to reflect that success. Meanwhile, NAB is in the middle of its almost decade long CSR project (called Nextgen) and is <a href="http://www.afr.com/technology/enterprise-it/nab-tech-chief-looks-past-nextgen-to-brighter-future-20150213-13e0n1">constantly changing its management</a>, which does not bode well for its completion in the near future. On the other hand, the new Chief Information Officer (CIO) of Westpac has <a href="https://delimiter.com.au/2015/09/08/cio-curran-outlines-ambitious-westpac-it-consolidation-strategy/">denied</a> that the firm needs a CSR, and has embarked on a much needed face-lift to the bank’s ageing systems. </p>
<p>After a number of attempts to <a href="http://www.technologydecisions.com.au/content/cloud-and-virtualisation/article/anz-taps-ibm-for-45-m-transformation-project-404437477">change its core systems</a>, the new management of ANZ have just announced that they are hiring an ex-Google executive to become its head of <a href="http://www.smh.com.au/business/banking-and-finance/anz-bank-hires-google-executive-maile-carnegie-20160301-gn74st.html">‘digital banking’</a> - but to do what is still not certain. </p>
<p>Given the oft repeated fact that some 70% of <a href="http://www.som.cranfield.ac.uk/som/som_applications/somapps/oepcontent.aspx?pageid=14249&apptype=newsrelease&id=2334">IT projects fail</a>, it looks like one or more of the banks are in for some big headaches over the next decade.</p>
<hr>
<p>For this snapshot, the information is collected from the latest annual reports (2014-2015), except for CBA which reported its semi-annual numbers in February 2016. The risk figures are taken from the 2016 December quarter APS 330 reports of the banks to APRA, which are available at the banks’ websites.</p><img src="https://counter.theconversation.com/content/55627/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Analysis of the similarities between Australia’s four largest banks shows all are exposed to risk of a housing bubble burst and face threats from digital disruption.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/551592016-02-23T00:05:18Z2016-02-23T00:05:18ZNational Australia Bank – 30 years of strategy failure<p>In its first quarter results this month, the National Australia Bank (NAB), breathed a sigh of relief <a href="https://yourir.info/b5feefbdd441bae08e2f4f4553858501/NAB_NAB_2016_First_Quarter_Trading_Update.pdf">announcing</a> that the “separation” of Clydesdale had been “successful” with an expected loss of approximately A$4.2 billion. Though the final number for the loss might be a little larger, the “demerger” of Clydesdale/Yorkshire Bank (CYBG) actually marks the end of a 30-year strategy of overseas expansion by NAB. </p>
<p>NAB’s “growth by overseas acquisition” strategy gives a rare opportunity to look at a corporate strategy over a very long period (almost 30 years) and while the strategy cannot be termed a catastrophic failure it was far from a roaring success. So why did NAB’s board persist in what was, for a very long time, a losing strategy?</p>
<p>The study of “strategy” usually involves looking at a successful company and trying to determine the reasons for its success. The rationale is that if one is smart enough to discover the reasons then those secrets can be packaged into a recipe which anyone can copy and therefore everyone benefits. Sometimes it works, sometimes it doesn’t – there are few Apples or IBMs, but there are many RIMs (makers of Blackberry – whatever happened to that firm?).</p>
<p>There is an old saying “Success has many fathers but failure is an orphan”. And typically when a strategy fails, such as that of <a href="https://theconversation.com/masters-a-failure-of-corporate-governance-53619">Woolworths</a> and Masters, the immediate reaction is to dump all of the blame upon the unfortunates who happen to be in charge when the bad news is finally given. [Here “unfortunate” is relative as there is quite often a payoff to cushion the blow, which is rarely unexpected anyway].</p>
<p>Henry Ford was one of the many business, political and military leaders who knew the advantage of failing, in that failure gives one the opportunity to learn</p>
<blockquote>
<p>“The only real mistake is the one from which we learn nothing.”</p>
</blockquote>
<p>So the study of strategy can benefit from considering failures and attempting to learn from them.</p>
<p>In the mid-1980s, Australia was a different country, not least one where a government could undertake major economic reforms without “<a href="http://www.smh.com.au/federal-politics/political-news/malcolm-turnbull-scott-morrison-face-backbench-backlash-if-liberals-hike-gst-20160203-gmkmvr.html">bed-wetters</a>” derailing it. By 1985, the Hawke Labor government (building on work started by the previous Fraser government) had floated the Australian dollar, deregulated the banking system and permitted 16 foreign banks to set up shop in Australia.</p>
<p>And following Australia’s win in the Americas Cup in 1983, there was an optimism that Aussies could compete as equals in the global economy. It was (until now?) the most exciting time to be an Australian businessman/person.</p>
<p>In 1987, the country’s largest bank, the National Australia Bank, headed by the combative executive director of banking and later CEO, Don Argus, sallied forth and bought the Clydesdale Bank, the Northern Bank in Northern Ireland and the National Irish Bank in the Republic of Ireland. NAB acquired these “Celtic Fringe” banks from one of the largest banks in the UK, Midland Bank, which, as a result of a failed expansion strategy into the USA, was under pressure to dispose of some assets in a fire sale. Surely NAB could do better than that?</p>
<p>In 1990, NAB ventured into England and purchased the Yorkshire Bank, a 120-year old bank headquartered in Leeds. The overseas expansion strategy continued and, in 1992, NAB acquired the Bank of New Zealand (BNZ) and in 1995 acquired the US based Michigan National Corporation (MNC), the bank’s first foray into the US market.</p>
<p>NAB was on a roll and, in its 1997 annual report, flushed with success the bank announced its vision was to be “the world’s leading financial services company” and it was continuing its strategy of “growth organically and through well considered acquisitions”. The board noted that the foundation for a “new phase” had been laid, especially creation of a “core processing centre [to be set up in Melbourne] to service all of its European banks”. Recognised as being a leader in technology, NAB also announced plans to develop online banking capabilities in Australia and New Zealand and telephone banking services in the UK and USA. </p>
<p>But overseas acquisitions were far from finished and, in 1998, NAB acquired HomeSide, Inc., at the time one of the largest mortgage servicers in the United States. The board had “identified considerable value from the application of HomeSide’s proven capabilities and systems”. In what was to be the first implementation of its so-called global “Product Productivity” strategy NAB noted that: </p>
<blockquote>
<p>“HomeSide will continue to build its profitable business in the United States while introducing its proprietary software and management practices across the Group – starting with Australia. In the process, HomeSide will create the first of the National’s global product specialists.”</p>
</blockquote>
<p>So as the century came to a close, thankfully without the armageddon prophesied by the Y2K bug, NAB was well-placed to grasp the opportunities of the 21st century. But it was to chart these new waters without its charismatic CEO Don Argus, who had announced in 1999 that he was jumping ship to become chairman of BHP Billiton, the world’s largest mining company.</p>
<p>There could not be a better time than 2000 to have a stocktake. What had NAB achieved in its 15-year quest to become the world’s leading financial services company?</p>
<p>Less than one might imagine. The banks that had been acquired were peripheral in the markets in which they operated, Scotland, Ireland and Michigan rather than in London or New York. In particular, Clydesdale remained a second tier bank, while its Scottish counterparts, the Royal Bank of Scotland and the Bank of Scotland, were growing manically, of course heading for a spectacular crash in the global financial crisis. Maybe NAB was lucky to dodge that bullet.</p>
<p>The bank’s idea that it could service this small but widely dispersed set of overseas banks from Melbourne was naïve, based on the assumption that a bank account was a bank account and a mortgage was a mortgage everywhere in the world. The bank was about to be disabused of this misconception in a few years, with the disaster that became <a href="http://www.theaustralian.com.au/business/dont-mention-the-h-word-at-nab/story-e6frg8zx-1111112576898">Homeside</a>. </p>
<p>It should be noted here that the acquisitions of BNZ and later in 2000 of MLC Life Limited (the insurance and investment arm of Lend Lease) should not really be seen as part of the bank’s international growth strategy but a reaction to the other large Australian banks acquiring local insurance and investment companies to become what are known as “universal banks”.</p>
<p>But the Millennium was the peak of NAB’s overseas adventures.</p>
<p>In 2000, NAB disposed of MNC to the large Dutch bank ABN-AMRO posting an accounting gain on the transaction of some US$1 billion, for a small “win”. But having spectacularly failed to understand the complexities of the US mortgage market, NAB was forced to offload its Homeside operations in 2002 booking a loss of over US$2 billion on the sale. This loss more than wiped out the smaller gain on MNC making the expansion overall into the USA a loss-making strategy for the bank. </p>
<p>In 2004 under new CEO, John Stewart, NAB agreed to entirely exit its Irish banking operations selling both the Northern Bank, and National Irish Bank to the Danish Danske Bank Group, booking a profit of just over A$1 billion on the transaction.</p>
<p>In 2005, the board restructured the UK operations subsuming Yorkshire Bank into the larger Clydesdale, “in order to reduce associated corporate and support infrastructure costs,” leaving Clydesdale as the only NAB bank remaining in Europe.</p>
<p>In a rush of blood to the head, NAB returned to the acquisition trail in 2007, acquiring the US privately held corporation Great Western Bancorp (GWB) for just over A$ 1 billion. The reason given was a potential match with one of NAB’s strengths in the Australian market - its leading position in lending to agribusiness.</p>
<p>The timing couldn’t have been worse, GWB was bought just as the global financial crisis heaved into view.</p>
<p>In 2009, the GFC began to hit home and NAB reported a significant drop in net after tax profits (- 42%) mainly due to charges for increased doubtful debts, especially in the UK, and investment losses in the MLC business. And, very quietly, the new CEO, Cameron Clyne, announced a change in the focus of the firm’s strategy – to concentrate on Australia. The beginning of the end.</p>
<p>But it is sometimes much easier to get into something than get out of it.
In 2011, the board announced that provisions had been set aside to cover claims against Clydesdale for mis-selling of Payment Protect Insurance (PPI) contracts and also announced credit rating downgrades not only on Clydesdale but also the bank itself. </p>
<p>In 2015, after first trying to float GWB, NAB sold it, booking a loss of A$67 million on the sale. This left only Clydesdale. After announcing in 2014 that the bank wished to sell its last remaining overseas acquisition, NAB eventually managed to offload Clydesdale in 2016 with a loss expected to be some A$4.2 billion. </p>
<p>With that, NAB’s overseas adventures were finished (at least for the time being).</p>
<p>With hindsight, NAB’s overseas acquisitions (with the exception of BNZ) were opportunistic rather than strategic, the corporate equivalent of a “quick pick” on the Melbourne Cup. Banks were acquired for little reason than they had come up for sale and were disposed of when the going got a little tough. The acquired companies were peripheral rather than major players to the markets in which they were operating and added little to NAB’s successful Australian businesses.</p>
<p>The bank never got close to achieving its goal of being the “world’s leading financial services company”. Hubris trumped by reality.</p>
<p>But it is not only NAB that is appearing to have second thoughts about international expansion. In January, the new CEO of ANZ Bank, Shayne Elliot, appeared to wind back the bank’s Asian ambitions championed by his predecessor Mike Smith, <a href="http://www.smh.com.au/business/banking-and-finance/anzs-elliott-wants-to-improve-asian-returns-20160127-gmezo0.html#ixzz40s3EkDkP">stating</a> that rather than focusing on targets for the contribution of Asian earnings, he would favour a “back to basics” approach, concentrating more on Australia and New Zealand. </p>
<p>Where do these retreats leave the much vaunted ambition for Australia to become a “financial hub” for Asia? Pretty much back at square one. </p>
<p>However, that may not be a bad thing for Australian investors. The recent <a href="http://fsi.gov.au/">Financial Services Inquiry</a> (FSI) recommended that Australian banks must be “<a href="http://www.reuters.com/article/2015/10/21/idUSFit93760220151021">unquestionably strong</a>” to ensure survival in volatile (if exciting) times. A little bit of <a href="https://theconversation.com/where-is-the-australian-financial-services-sector-going-49702">tending to the home front</a> for the next few years might not be such a bad thing.</p><img src="https://counter.theconversation.com/content/55159/count.gif" alt="The Conversation" width="1" height="1" />
In its first quarter results this month, the National Australia Bank (NAB), breathed a sigh of relief announcing that the “separation” of Clydesdale had been “successful” with an expected loss of approximately…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/458352015-08-31T20:07:49Z2015-08-31T20:07:49ZBank exposure to coal projects drowning in greenwash<figure><img src="https://images.theconversation.com/files/93397/original/image-20150831-13143-1lbc4b5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Good for humanity?</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>The development of black coal mines in Australia continues to attract controversy, with <a href="https://theconversation.com/newcastles-divestment-is-a-chance-for-the-worlds-largest-coal-port-to-consider-its-future-46807">divestment campaigns</a> gaining momentum. The role of banks in financing such projects has come under scrutiny.</p>
<p>But to what extent are Australian banks lending to coal mine projects?</p>
<p>When asked about its support for the sector recently, a Commonwealth Bank spokesperson used rhetoric akin to that of a politician, <a href="http://www.afr.com/business/mining/coal/cba-still-supports-coal-with-26b-exposure-to-the-sector-despite-adani-setback-20150807-gity7e#ixzz3jKGdAdNI">saying:</a></p>
<blockquote>
<p>“CBA’s role is to support the Australian economy.” </p>
</blockquote>
<p>The bank provided <a href="https://www.commbank.com.au/content/dam/commbank/assets/about/who-we-are/sustainability/2015-02-05-group-energy-exposure-and-finance-emissions-energy-sector.pdf">finance to facilitate 940 kilotonnes</a> of coal extraction during the 2014 financial year.</p>
<p>How can it be in the interests of the Australian economy, not to mention the bank’s long term investors, to fund new development of carbon intensive energy sources with risky futures? At odds with such statements of economic benefits is the tendency of banks to downplay such “investments” and disclose the small percentage make up of emissions intensive energy financing to their total credit exposure.</p>
<h2>Soft approach</h2>
<p>Disclosure by banks on exposure to coal projects tend to be reactive, with bank websites and annual reports revealing very little hard information about their approach to investment in carbon intensive sectors. </p>
<p>Indeed a long standing criticism of the sustainability disclosures of the world’s big banks is that, while they report often quite detailed information on the environmental impact of their operations or their community work, they say little about the social and environmental impact of their lending portfolio. Financing the arts is nice, but a distraction from the main issue. The balance is all wrong and, arguably, deceptive.</p>
<p>Not much has changed and where disclosures exist they lack detail or a convincing commitment. For example, ANZ’s quantified <a href="http://www.anz.com/about-us/corporate-responsibility/environment/">environmental targets</a> relate to its own operations, not its lending practices. Targets concerning its energy consumption and greenhouse gas emissions of its operations and the environmental impact of paper consumed on behalf of its customers are trivial by comparison.</p>
<p>NAB’s <a href="http://www.nab.com.au/content/dam/nab/about-us/our-business/esg-risk-principles.pdf">ESG Risk Principles</a> involve looking “for opportunities to minimise both the direct and indirect negative environmental risk and impacts from our operations, products and services”. Without data on the environmental impacts of products and services, statements such as these are unconvincing. </p>
<p>Likewise, HSBC’s <a href="http://www.hsbc.com/citizenship/sustainability/finance">Energy Sector Policy</a> “adopts a cautious approach to activities which contribute significantly to climate change and which have a long asset life inconsistent with the transition to a low carbon economy” and “will increasingly support only new CFPPs which have lower carbon intensities”. Not really a commitment to addressing what is increasingly seen as a key business risk – climate risk.</p>
<p>In 2013 the RBS Group did <a href="http://www.rbs.com/content/dam/rbs/Documents/Sustainability/Energy_Financing_Report_2013.pdf">report</a> hard facts on its lending to the UK energy and power sectors. Since then its <a href="http://www.rbs.com/content/dam/rbs/Documents/Sustainability/2014%20docs/Equator_principles.pdf">reporting</a> against the <a href="http://www.equator-principles.com/index.php/ep3">Equator Principles</a> shows that in 2014 it was invested in one class A project defined as “Projects with potential significant adverse environmental and social risks and/or impacts that are diverse, irreversible or unprecedented”. Further details were not to be found.</p>
<h2>Customers vs investors</h2>
<p>Pressure on the big banks is coming from customers as well as environmental groups. The growth of <a href="http://drcaroladams.net/what-is-a-sustainable-bank-an-interview-with-david-korslund-global-alliance-for-banking-on-values/">sustainable banks</a> demonstrates the shift in society’s (and customers’) views on the matter. </p>
<p>Investors in the big banks should be more concerned. While the long term risk to the environment is a key concern, the loss of customers through wishy-washy commitments and lack of information is an immediate concern. Customers and investors are increasingly seeking information about exposure to carbon, for example, details of the emissions produced by power generators to which funding is provided. There is no doubt questions at AGMs will continue to put pressure on banks to increase disclosures on the emissions intensity of their energy lending.</p>
<p>In the meantime, banks seem more focused on setting targets for paper consumption and the carbon emissions of running their offices and branches, than the more important issue of carbon intensity of the projects they lend to. </p>
<p>The inevitable switch to focusing on the financial risk of lending to a challenged sector will be driven by pressure groups, employees and perhaps, most importantly, a new generation of customers.</p><img src="https://counter.theconversation.com/content/45835/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carol A Adams is a Professor of Accounting at Durham University and a member of the Climate Disclosure Standards Board's Technical Working Group. </span></em></p>Australia’s biggest banks seem more concerned with disclosing how much paper they recycle than their lending exposure to coal mines.Carol A Adams, Professor of Accounting, Durham UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/467412015-08-27T05:31:54Z2015-08-27T05:31:54ZAustralia’s banks are safe, so deposit levy is looking like a revenue grab<p>The closer one looks at <a href="https://theconversation.com/the-obvious-and-not-so-obvious-problems-with-hockeys-bank-deposit-tax-46187">the government’s recent decision</a> to levy a deposit tax against Australia’s Big Four banks, the more it seems like a revenue grab. Nothing more, nothing less.</p>
<p>An inspection of the legislation reveals that in the event of the failure of an Australian bank, there is no need for a levy to fund a depositor bailout. That means this proposal is not a deposit levy. It is simply another tax, with little to do with protecting depositors in the event of a bank failure.</p>
<p>Three crucial factors substantiate this assertion: the Banking Act, the levels of retained capital, and hypothecation (the practice of pledging collateral against debt).</p>
<p>We’ll explain why. </p>
<p>First, to the Banking Act of 1959, in particular s 13A, which provides that in the event of insolvency, an Australian bank (referred to as an authorised deposit taking institution, or ADI) is required to reimburse Australian “protected” depositors before settling claims by international creditors or offshore depositors.</p>
<p>Section 4 of the Act defines a protected account as:</p>
<blockquote>
<p>An account, or covered financial product, that is kept under an agreement between the account-holder and the ADI requiring the ADI to pay the account-holder, on demand by the account-holder or at a time agreed by them, the net credit balance of the account or covered financial product at the time of the demand or the agreed time (as appropriate).</p>
</blockquote>
<p>Effectively therefore, protected accounts are all demand deposits. That is to say, deposits where the owner of the funds can withdraw their funds at any time.</p>
<p>The University of Melbourne’s Professor Kevin Davis has <a href="http://kevindavis.com.au/secondpages/workinprogress/2015-04-30-Depositor%20Preference%20and%20Deposit%20Insurance.pdf">run the numbers</a>, and his findings are that in the event of insolvency, no Australian bank would be so bankrupt that it would not, at least, be able to reimburse Australian depositors.</p>
<p>If Australian depositors are protected as preferential creditors (which they are), and if at current capital adequacy levels no Australian bank would be unable to <a href="http://www.kevindavis.com.au/secondpages/workinprogress/2015-04-30-Depositor%20Preference%20and%20Deposit%20Insurance.pdf">refund domestic depositors</a>, then the obvious question is why do we need this levy?</p>
<p>Secondly, the notion that this is some kind of “user pays” scheme is disingenuous. Today in Australia it is almost impossible to exist, in any meaningful economic sense, without a bank account. </p>
<p>That means any deposit into an account in any of the big four – drawing a wage or conducting any kind of business – will be covered by this levy. So as revenue grabs go, this one catches in the net something like <a href="http://www.theguardian.com/business/grogonomics/2014/jan/30/too-big-to-fail-banks-stranglehold-australian-loans">80% of all deposits</a>.</p>
<p>In theory, the monies collected by the levy will be held in (that is, hypothecated to) a new entity, the Financial Stability Fund (FSF). Other than its name, little is known about this <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2015/March/Funding-The-Financial-Claims-Scheme">new fund</a>. It is obviously meant to be a long-term mechanism as it will take many years - the exact timing being dependent on the levy rate chosen - before the fund will cover even a small percentage of potential pay-outs to depositors.</p>
<p>However, the fund is not designed to cover all pay-outs to depositors in the event of a bank failing, but only any amounts not recovered by other means. <a href="http://www.australiancentre.com.au/sites/default/files/NewsDocs/Day1Paper6%20-%20Ross%20Buckley.pdf">Calculating the size of the levy</a> is problematic and must then take account of other measures, particularly the amount of capital that banks hold.</p>
<p>In suggesting that a so-called “ex-ante” levy be introduced to promote financial stability, the <a href="http://www.apra.gov.au/AboutAPRA/Publications/Documents/cr12308%5B1%5D.pdf">IMF</a>also recommended that additional capital, in the form of so-called Higher Loss Absorbency (HLA), be required for “systemic” banks (which in the case of Australia would be the Four Pillars). </p>
<p>This recommendation has been accepted by banking regulator APRA and, from January 2016, the big four banks will be <a href="http://www.apra.gov.au/adi/Publications/Documents/Information-Paper-Domestic-systemically-important-banks-in-Australia-December-2013.pdf">required to hold an additional 1% HLA capital buffer</a>. This additional 1% capital, which APRA admits is at the low end of international levels, must be met through so-called Tier 1 Equity capital, which helps to explain the current capital raising efforts of the banks and the negative impact on their share-prices.</p>
<p>Since it is expected that a bank’s capital should be sufficient to withstand all but the most severe shocks, it is a moot point whether the belt-and-braces approach of collecting an additional levy would add much towards ensuring financial stability. As it is not yet known how much of a buffer the new levy will actually provide over time and no mechanism has as yet been created to manage the monies collected, the decision to go ahead with the levy appears to be a path of least resistance (blame it on the previous government) rather than well-considered public policy. </p>
<p>In particular, the use of a fixed levy (of the order of 0.05% of deposits) is not in line with international experience, where a risk-adjusted fee is often used, and may be more <a href="http://www.australiancentre.com.au/sites/default/files/NewsDocs/Day1Paper6%20-%20Ross%20Buckley.pdf">appropriate to the Australian banking system</a>.</p>
<p>The Murray inquiry went so far as to reject the idea of a deposit levy in favour of requiring Australian banks to be “unquestionably strong” and in the top tier of international banks as regards capital. It appears that by cherry picking recommendations from the IMF and the Murray inquiry, the government may be in danger of increasing the costs of banking in Australia without improving the stability of the system. Who would have guessed?</p><img src="https://counter.theconversation.com/content/46741/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Andrew Schmulow is affiliated with The Secular Party of Australia, whom he advises from time to time, Fiona Patten, Victorian MLC, whom he advises from time to time, and Dr Dion George, Shadow Finance Minister in the Democratic Alliance, official opposition in the National Parliament of South Africa, whom he advises from time to time. He has in the past received research funding from universities and other academic research funding bodies. The Centre for International Finance and Regulation provided a research grant in which he was involved. He is an active supporter of Conservation Australia, and an active supporter of the cause of marriage equality in Australia.</span></em></p><p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The federal government’s decision to implement a deposit levy may increase the costs of banking in Australia without improving the stability of the system.Andrew Schmulow, Principal, Clarity Prudential Regulatory Consulting Pty Ltd. Visiting Researcher, Oliver Schreiner School of Law, University of the Witwatersrand, Johannesburg., The University of MelbournePat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.