CONCRETE DETAIL
by Christopher Joye
Posted 13 Jul 2009 9:23 AM
Govt does not rule out inquiry
There has been interesting media follow-up on our open letter to the government. On Channel 10’s Meet the Press yesterday, Minister Chris Bowen was asked about how the government would respond to our call for a system-wide inquiry:
JOHN STANLEY: The six economists who came up this week with a plan for overhauling the financial system – a lot of focus on the plan for a people's bank that was buried within it – but your government has never been averse to having inquiries. They want another inquiry into the financial system. What would be wrong with doing that, particularly after the global financial crisis where so many of the things that we've done in the past have been shown to be wanting?
CHRIS BOWEN: Well, I think it’s important to note that Australia’s financial system is getting through the financial crisis better than, effectively, any other financial system in the world and we need to always remember that. But, yes, there are issues around competition – they’ve been well-noted – but we still have four of the now eight top banks in the world that are AA-rated. We haven't had to rescue a financial institution, which almost every other developed country in the world has had to do. So there’s a lot going for the Australian financial system. We wouldn't rule out a review at an appropriate time, but at this point in the cycle, we're just focused on getting us through the global financial crisis and working with the strengths of the Australian financial system which has stood us in good stead.
There are also two excellent articles in the AFR and The Sheet today. The AFR’s top banking writer, Andrew Cornell, has an interesting analysis of the issues facing policymakers following on from our letter:
“A people's bank was alluded to in an open letter drafted by a wad of eminent economists – who must have been rapt with the response – although it was by no means the point of their proposals.
Kiwibank is an offshoot of New Zealand Post, forced into being by NZ Labour's junior coalition partner. The first branch opened in 2002 and the bank has run like a dream, although of late its role as price-setter has been reined in a tad. And it is small – about 3 per cent of deposits and 6 per cent of mortgages – and no-frills.
NZ banking is dominated by the same oligopoly as here, and the bank happily runs the slogan: Kiwibank: It's Ours.
But Kiwibank is the least worst approach for interventionist government. If the Rudd government, as form suggests, is intent on showing it is truly worried by the cyclical exaggeration of the Big Four's market dominance, prodding Australia Post to do more with its financial services capability is a good option…
Another crucial element of this crisis, and one last week's open letter also canvassed, is the nature of the social contract between the banks and taxpayers. One economist, Rismark's Christopher Joye, quite rightly argues that simply because Australia and its major banks have come through this crisis relatively well, so far, doesn't mean everything is fine.
There are significant issues from the 1997 Wallis Financial System Inquiry still alive, including the issue of government guarantees. That deposits had to be guaranteed was a response to the global situation. But the average depositor assumes they will be bailed out.
Some element of moral hazard is inevitable in a financial system. The private sector is best placed to mediate the capital in the system and shareholders and depositors should be aware of the risk. But at some point it is more damaging to society to make those who took the risk pay than it is to keep the system afloat.
That point was reached in Britain and the US in this crisis. It wasn't here, and we should understand exactly why.”
Ian Rogers’ banking bible, The Sheet, also wades into the debate today with some key messages for government:
“Six prominent economists released an open letter to the Prime Minister and Treasurer last week. Included in the letter was a question that asked whether there might be a role in Australia’s financial system for a publicly owned bank “akin to Kiwibank in New Zealand” that could offer basic savings, payments, and wealth management products and leverage off unique government infrastructure such as Australia Post, the ATO and the government bond market.
The proposed bank was dubbed Koala Bank by some…Koala Bank…was what the media picked up on, somewhat overlooking the real thrust of the letter, which set out why Australia needs a comprehensive financial system inquiry. The Koala Bank question was the ninth among 14 that were suggested for examination by an inquiry.
Given that we are in the midst of the GFC, which has devastated the global financial system; the US and UK are reviewing their own financial systems; we will soon be confronted with recommendations from the G20 on the overhaul of the global financial system; and that the last inquiry we had was the Wallis inquiry completed in 1996; such an inquiry would seem to be a very good idea – much has changed in the last 13 years.
Political leaders at the Federal level appeared to be supportive of the call for an inquiry, but not the government. Presumably, they are happy with the policy that they have made on the run and the unintended consequences that have flowed from it (such as having to guarantee just about everything that moves in the financial market), and have more important matters to deal with.
Events may move ahead of the government anyway, with Graeme Samuel threatening to hold his own inquiry into the financial system, if he receives another bank merger proposal. Such an inquiry into the competitive position of our financial system would likely address many of the questions that have been put forward anyway.
But added to the list of questions could be added one on why we have failed to develop a viable corporate bond market in Australia. All the necessary infrastructure is in place with supportive legal, regulatory and taxation environments, and we have a sizeable corporate sector and institutional funds management industry.
Yet for the last half of this decade our market has looked more like a wholesale bank deposit market, denying institutional investors the opportunity to demonstrate their credit risk assessment skills, and now the market is morphing into a government bond market.
Many academic studies have pointed to the usefulness of well developed corporate bond markets in mitigating the effects of a credit crunch.
But the big question, which is beyond the scope of an ACCC inquiry, is what is the post G20 restructured global financial system going to look like and do we want to have a say in this or have it thrust upon us? For those who believe we have or will have no influence in the G20, the question is irrelevant: don’t worry about it.
For the rest of us, an inquiry would have us better prepared to meet the challenge. We are also in the fortunate position of being able to review our financial system from a position of strength.”
Finally, one of my co-authors, Joshua Gans, has an article on the subject in The Punch today while the SMH has published this column examining the debate.
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