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Former RBA governor Ian Macfarlane has come up with a piercing, counter-intuitive insight into why Australia has so far managed to avoid the worst of the global financial crisis.
Actually, two piercing counter-intuitive insights to be precise:
1. The four pillars policy acted to reduce takeover competition between the banks, which reduced their propensity to take excessive risks to escape being taken over;
2. There was a savings shortfall in Australia, relative to lending opportunities here – the reverse of the situation in Europe and Japan – which kept them out of the US sub-prime mortgage market.
He was speaking at this morning’s session of the Australian Securities and Investments Commission’s annual summer school in Sydney with a stellar panel headed by ASIC chairman Tony D’Aloisio, with ASIC commissioner Belinda Gibson, the APRA chairman John Laker, the chairman of the ACCC, Graeme Samuel, the Deputy Governor of RBA, Ric Battlelino, and David Gruen from Treasury, filling in for Treasury Secretary, Ken Henry, who couldn’t make it.
On the first point, Ian Macfarlane contends that there is no competition as intense as the competition for control.
He listed many of the bank takeovers in the US, Europe and the UK over the past ten years or so and asserted that, as a result of the constant threat of takeover, banks in those places developed an “equity culture instead of a banking culture”.
“You had to get big, or be taken over, and that meant taking on more and more risk. Why didn’t that happen here? Because there has been no competition for corporate control. That curious creature, the four pillars prevented it.”
It’s curious, he said, because it’s nether in legislation nor in the ACCC’s mandate, and is 'loathed' by all the bank CEOs.
“But the most curious thing is that while its purpose is to maintain competition, it has ironically served to reduce it, and thereby contributed to the stability of our banking system”.
Supporting his contention is the fact that the only other country whose banking system is not in total disarray and in need of bailing out is Canada, which also forbids mergers among its five major banks.
So this cause of great frustration for Australia’s bank CEOs, has actually saved their bacon, according to the ex-governor, although Graeme Samuel did point out that if taken to its logical conclusion that idea would lead to the abolition of four pillars so there could be even less competition.
Macfarlane’s other contention is that another big frustration for bank CEOs – that they don’t have enough domestic deposits to fund their domestic lending opportunities – has been a second bacon saver.
“European banks have had domestic deposits well in excess of available lending opportunities, and as a result they have bought huge quantities of US sub-prime mortgages, CDOs of them, and synthetic CDOs of the CDOs, and so on, to use up their surplus funds,” he said.
“Although the Australian savings shortfall left our banks vulnerable to currency movements, it saved them from investing in all those things…”
And here’s his punchline: “But they would have if they could have.”
In other words, and he didn’t exactly say this, the relative health of Australia’s banks is not much a result of their superior management, but pure luck: that they aren’t allowed to take each other over, and they haven’t had enough funds to invest in US sub-prime mortgages and CDOs.
Tony D’Aloisio then asked for a show of hands from the audience: “hands up all those who think Australian banks escaped the meltdown so far because of dumb luck”. A forest of hands shot up.
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