Nobody Need Fear a Banking Inquisition
Head for the hills -- the nightmare scenario that Australia's banks have long feared may be about to come to pass.
Laws to start an official inquiry into the industry could clear the country's lower house of parliament next week, the Australian Financial Review newspaper reported Tuesday, after a second member of the government's ruling coalition sided with opposition politicians seeking a probe. Executives of the big four banks have endured balance sheet levies, fines and grillings before legislators in their hopes of averting such an outcome. Now, all that may be in vain.
Their share prices tell a different story. Westpac Banking Corp., National Australia Bank Ltd., Australia & New Zealand Banking Group Ltd. and Commonwealth Bank of Australia all edged down, but none by more than a percentage point. Hardly the reaction of an industry in jeopardy. How to explain the divergence?
One reason is that Australian Royal Commissions and Commissions of Inquiry, for all their powers and pomp, tend to be paper tigers. Despite dozens of investigations carried out over the years and millions of column inches dedicated to their proceedings, it's remarkably hard to find evidence of lasting policy effects.
After the Cole commission into the country's construction industry reported in 2003, the government struggled for years to pass related legislation in the absence of opposition support. The over-representation of indigenous Australians in prison has been rising for decades, despite that factor being named as one of the central issues of a 1991 commission into Aboriginal deaths in custody. Inquiries into an insulation-subsidy program and trade-union corruption set up by the current government in 2013 were treated by the opposition as politicized star chambers.
While a commission will probably divulge embarrassing details and chew up executives' time, it's hard to argue real political change will result. Ultimately, only shifts that receive sufficient bipartisan support make it through Australia's parliament.
That applies in the case of a putative banking commission, too. Australian lenders have a job on their hands to clean up the fast-and-loose internal cultures that have led to scandals around interest-rate rigging and money laundering, but the elephant in the room of any inquiry will be the role that successive governments and regulators have played in creating the conditions that cause many Australians to resent their banking system.
Here are a few things that would go some way to improving public trust:
- Endowing regulators with the enforcement powers and willpower to punish banks that step out of line -- but that looks like emerging anyway as a result of a separate Treasury report last month;
- Taking the edge off the spiraling cost of housing in Australian cities -- but that too appears to already be in train, thanks to a building boom that's causing rents to grow at the slowest pace in several decades;
- Clamping down on some of the loose lending practices that have historically turned tight housing supply into spectacular rises in house prices -- but that shift began some years ago after the Reserve Bank of Australia's perverse opposition to macroprudential regulation started to soften;
- Reversing the economic divide between the haves and have-nots in the property market -- but there's still a bitter dispute between the government and opposition over whether to end policies like the roughly A$2 billion ($1.5 billion) a year investor subsidy via "negative gearing." 1
These changes won't be sufficient on their own -- but they'll go a lot further toward improving the conduct of banks and the confidence of customers than special balance-sheet levies or public hearings.
Australia's banking system, for all its faults, is reasonably competitive, and its flaws are ones that governments and regulators have allowed to develop. As such, public distrust in lenders is best understood as a synecdoche for public distrust in the economy and governance as a whole. Only when the latter improves will the former be able to recover.
Negative gearing allows property investors to offset any rental losses relative to their mortgage costs against income tax. The estimate of foregone tax revenue compares to the A$1.3 billion a year that Canberra dedicates to supporting states' affordable-housing programs.
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Katrina Nicholas at firstname.lastname@example.org