By Roger Raven
Until the early 1970s, the system of financial regulation relied largely on controls on banks' freedom to manipulate their assets and liabilities, through regulation of interest rates, the purposes for which money was lent and foreign exchange transactions. As money was rationed, there were special-purpose banks for start-up finance for business (for example, the Commonwealth Development Bank) or agriculture (the Primary Industry Bank of Australia, now wholly owned by the Rural and Industry Bank).
Increasingly, problems appeared. The financial system was becoming much more integrated, both domestically and internationally, while since building societies and credit unions were free from Reserve Bank control, they were increasingly effective competitors of the banks. Keynesian interventionism remained sufficiently influential up to this time to ensure that this difficulty was met by changes in regulations rather than deregulation.
The Campbell Committee of 1981 was very mildly regulatory in its approach. But the review group chaired by Stephen Martin in 1983 and the banking inquiry chaired by Stephen Martin in 1991 both took care to produce the result wanted by the Labor government's power brokers — open slather for deregulation.
Freedom for the pike
Being the only substantial holder of foreign currency prior to 1983, the Reserve Bank had been a sitting target for speculators. The floating of the dollar in December 1983, which marked the beginning of deregulation, was forced by the enormous cost of maintaining a fixed exchange rate. As a result, the government lost the power to control speculation by simply vetoing transactions that seemed speculative, though by 1983 that power was never used anyway.
To gain the benefits of both scale and size, a series of bank mergers subsequently took place in which seven medium-sized banks in 1972 were reduced to four large ones by 1984. The main aim was to maximise asset growth, while profitability came second. One aim was to prepare for the competition from the 15 or so foreign bank branches that were to be allowed to operate in Australia. Building societies were also to be allowed to convert into banks, and subsequently 11 have done so.
Much of the 1980s corporate takeover frenzy was funded by foreign borrowings. Deregulation allowed the banks to encourage this orgy, and created a huge private sector debt in doing so. Now that the boom has bust, that enormous debt burden is forcing businesses to cut spending to a much greater extent than would otherwise have been necessary.
By 1992 Democrat ex-Senator Paul McLean had accumulated some 600 cases of bank corruption and malpractice. Investigative reporter Bob Bottom's view is that corrupt people always need corrupt lawyers and
The problems that were to occur with deregulation were in fact accurately forecast by commentators like academic Peter Groenwegen and Keynesian economists. Organised left groups like Democratic Socialist, Communist and Socialist parties were unable to influence the debate, lacking the resources and expertise to do so. However, the DSP was entirely correct in opposing both deregulation and the Accord from 1983.
Death for the minnow
Banks can be classified as national (the Big Four), regional, state owned or foreign. Overall, the big banks have remained the most profitable, regional and state-owned banks have their heads on the block, and the foreign banks have been put through the mangle.
From 1983 to 1992, bank profitability generally declined, bad debts increased, 15,000 jobs were lost and deregulation indirectly increased interest rates by several percentage points. Shareholders, borrowers, employees and governments have lost about $26 billion so far as a result. Business investment may have fallen by about $6 billion.
The foreign banks generally did terribly. While Citibank and Deutsche Bank have done well, the rest have between them typically lost about a billion dollars a year.
Today, all the Big Four have difficulties. Their problem loans total about $20 billion, some 30% of which may eventually be write-offs. However, they are the most profitable banks and all are basically sound.
It is the survival of the regional and state banks that is in question. Advance Bank excepted, they have shown a continuous decrease in profit. Because they serve niche markets, the credit unions are less at risk, but even so, 333 credit unions and 31 building societies have "exited" by merger or closure since the start of deregulation.
Two state banks alone — in South Australia and Victoria — cost their governments some $5.6 billion in bail-out costs. These losses were largely due to their finance affiliates, but indicated the reckless lack of control by, and accountability to, their state governments.
Already the State Bank of Victoria has been merged with the Commonwealth Bank, and the similar merger of other state banks has been touted for some years. In WA, the R&I is to be partially flogged off, and the others will most likely be sold piecemeal to one of the big banks, with little benefit.
As deregulation allows the biggest organisations to use their economic power to engulf the smaller players, in a few years' time it is likely only three big and three or four regional banks will remain. Challenge Bank's recent loss is equivalent to its cumulative profits since converting from a building society in 1987, and within 16 months it
Like this increasing concentration, schemes including securitisation, risk-netting, off-balance-sheet activities and strategic alliances, are attempts by senior management to continue the 1980s obsession with asset growth.
In general, the bank most committed to growth is the one which is the price leader in the industry. By going against the trend and increasing its interest rates just recently, and moving on the Bank of New Zealand, the National Australia bank has served notice that it is the new price leader and has ambitions with regard to banking in the Pacific region.
Forcing banks to be accountable is a difficult task in part because of their own inadequate management, but also because the left has not been capable of applying sufficient pressure.
[First of a series.]