By Chow Wei-Cheng
The banking sector is undergoing rapid changes. Branches are being closed, large numbers of employees are being sacked, industrial action is increasing, and mergers are sweeping the industry, worsening the wave of lay-offs and branch closures. Customers are being hit by transaction fees and near-zero interest payments on deposits. Mortgagors and credit-card holders are kept waiting for interest rate cuts to be passed on.
But bank profits keep breaking record highs. The losers in this profit-driven frenzy have been bank employees and customers.
Currently, the Wallis Inquiry, commissioned by Treasurer Peter Costello, is undertaking a review of the banking sector. Its first discussion paper, released last month, included submissions to the inquiry. Findings will be tabled in March.
It seems that most of the discussion so far has been swept up in the rush to create the most efficient, competitive, world-class, free-market model of banking. The interests of the average person have been sidelined or left off the agenda altogether. The question has hardly been raised — whose interests should the banks serve?
Issues raised so far are:
1. Deposit protection. Should the "implicit" guarantee on bank deposits continue?
The inquiry stated that banks should consider private insurance to relieve the government of its "implicit" obligation to guarantee bank deposits. While no such guarantee actually exists, it has been "understood" that the government would bail out banks and pay the depositors in the event of insolvency.
The reason for this change is, firstly, right-wing ideology. Some, particularly Treasury, would like the market to determine who is left standing after the removal of any guarantees.
The second reason is what is described in academia as "moral hazard": if banks are guaranteed against failure, they can take riskier (more profitable) lending decisions, with the risks paid by taxpayers. This contradiction arises because of the separation of ownership from taxpayers, and therefore the need to serve two groups. A simple solution would be to nationalise banks.
That solution, of course, is not raised in the inquiry. Solutions tabled include private insurance on deposits. This cost will most likely be passed on to customers. Another free-market solution involves allowing more mergers and foreign acquisitions to increase the banks' capital base. However, this is no guarantee against failure.
2. Regulation: how much should market forces prevail? How can regulation be "rationalised" between the different regulators — the ISC (insurance), AFIC (non-bank financial institutions such as building societies), ASC (companies), Reserve Bank (banks)?
Since the Campbell Inquiry and financial deregulation, there has been little direct regulation of banks. Instead, there is "prudential supervision" — self-regulation, with the RBA monitoring and setting a framework of prudent standards of conduct. These measures provide a minimal safety zone of activity to temper the excesses of the free market.
According to the Sydney Morning Herald, Campbell "is a far cry from the kind of laissez-faire mentality evident in many of the submissions to Wallis ... some submissions go beyond arguing for rationalisation of existing prudential arrangements and advocate a reduction in the overall level of prudential regulation and supervision along the lines of the New Zealand model. Under such a system, the authorities would ... ensure strong competition, strong information flows to investors and effective machinery to deal with fraud, and then leave it to markets to discipline bad performers." Treasury has been the most open advocate of this position.
The only guarantee would be the right to sue directors if the bank is severely mismanaged — a right really available to the very wealthy. This model assumes that anyone who wants to set up an account could interpret the bank's balance sheet to determine its solvency and interpret stock price movements to see how the market views the bank's outlook.
This "buyer beware" model also downplays the financial instability that comes from bank collapses. It is no wonder that the RBA and even the editors of the Australian Financial Review are distancing themselves from these neo-liberal extremes.
According to the AFR, "no one wants unnecessary government regulation. However, any move to change, let alone dilute, a regulatory structure that has delivered an essentially strong and secure banking system needs to be approached with a great deal of caution."
3. Mergers: should foreigners be allowed to acquire banks more easily, and can the ALP's "six pillars" policy be removed?
The ALP government's policy prohibited mergers among the big four banks and two major life insurers. Wallis has so far been silent on mega-mergers.
However, acquisitions of regional banks continue adding to branch closures and redundancies. The St George-Advance Bank merger is estimated to cost 1000 jobs from a total of 8900, and the Financial Services Union estimates around 35,000 jobs will be lost if two big banks merge.
The often cited "efficiency" rationale for mergers contradicts the real experience of US bank mergers, which have found no such efficiency gains.
4. Consumer protection: how can consumers be protected against being ripped-off by banks?
Groups such as the Consumers' Federation of Australia have voiced some criticism of the inquiry: "Our biggest concern is that the inquiry apparently believes that the finance industry should be regulated based on what is convenient for the industry not good for the protection of consumers".
5. Increased competition: should non-banks be allowed access to the payment system?
The payments system is the cheque clearing house. Only banks can access it. The question arises whether other providers of financial services should have access. The key to this debate is whether banks are "special". Since other financial competitors provide basically the same services, it is clear that the debate on "specialness" is more about favouring some capitalists over others.
From the limited scope of all these discussions, it is clear that the interests of big business are coming first.
Banks are making record profits: in 1996, the big four banks reported after-tax profits of $5.4 billion (Westpac $1.1 billion, NAB $2.1 billion, CBA $1.1 billion, ANZ $1.1 billion), an overall increase of 7.6%.
They achieved this through vicious cost cutting, sacking workers and closing branches. The FSU has calculated that 40,000 jobs have been lost over the last five years, and part-time employment has doubled.
ANZ, while forecasting the highest return on equity of all the banks and confronted by industrial action, is threatening an estimated 5000 redundancies and closure of up to 200 branches.
The last thing the banks need is any more help from Wallis. There is some lip service to "possible community service obligations" such as providing a low-cost basic banking product. But the fundamental question is avoided: whether the banks' operations are best achieved by a private shareholder-driven entity or a socially owned and controlled entity.
The existence of mutuals such as credit unions and insurers indicate that these services can be provided without using the shareholder form. More importantly, a nationalised banking sector under a democratically controlled state could provide more democratic input into how the banks are run and can place the interests of the community first.