All Power to the Big Four

 In June 1991, the American investment banker Albert Wojnilower participated in a Reserve Bank conference on financial deregulation. Concurrently, a major Parliamentary Inquiry into the Australian banking system was under way. The Martin Inquiry was forced on the Labor Government by public disgust with a banking sector serially incompetent and marginally corrupt that had evolved from the wholesale deregulation ensuing from the 1981 Campbell Report.

Wojnilower posited an instructive generalisation. National financial systems inevitably serve a public purpose but are largely constituted by profit-oriented institutions. Thus sectoral regulation is inevitable. But there is no natural equilibrium; the system is innately unstable because the pursuit of profit (in tandem with innovation) gradually undermines extant regulatory structures and regulation has to be perennially refashioned to ensure that the public interest continues to be served. Said Wojnilower: "the mere abolition of constraints will not automatically give birth to desirable new structures."

The Martin Parliamentary Inquiry produced a report in November that was fat but hollow. Wojnilower's insight fell on barren ground then and since. The public interest will be served at the finance sector's discretion.

The Big Four banks have been the major beneficiaries of the imbalance. Financial 'regulation' is effectively now primarily oriented to ensure their health. It goes beyond the catchphrase of 'too big to fail'. The situation could more accurately be labeled 'too powerful to be controlled'. That power has been appropriated and delegated to it by successive governments and regulators. Fierce lobbying has reinforced political lassitude, all rooted in an unthinking commitment to a flawed regulatory model.

How did we get here from there? By a series of separate but mutually reinforcing events. The political reaction to the early 1990s crisis is instructive. The crisis was facilitated by comprehensive financial deregulation, spawned by banking sector incompetence and crowned by monetary policy ineptitude. Minor adjustments were made (bank bad debts were now to be monitored on a quarterly basis), but no systemic reconsideration was contemplated of banking practices, banking culture and the regulatory apparatus. A foretaste of the recent crisis.

The banks' fostering of the foreign currency loan debacle, quintessential sign of dysfunctionality, was trivialised and ignored. In 1992, the Government amended the Tax Laws to allow banks to gain tax deductions for discretionary partial bad debt write-offs. Prime Minister Keating claimed that the change would benefit bank customers, but it has benefited only the banks. The concession remains intact, and the Tax Office has never examined the scheme (indeed, banking sector tax payments in general) for potential rorting.

Regarding banking numbers, the competition regulator has consistently legitimised banking consolidation, contrary to its own charter, that has underpinned the current dominance of the Big Four. The predation of the second tier reached its height in 2008 in the regulator's scandalous tolerance of the Westpac takeover of the rising St. George, immediately accompanied by the handing of BankWest to the Commonwealth Bank.

As of January 2011, within the banking sector, the Big 4 accounted for 82% of household deposits, 87% of housing loans to households and 83% of total gross loans and advances. Having their origins in narrowly focused trading banks, the banks are now allfinanz institutions. The Big 4 possess, know they possess, and seek to exercise their market power. If funding costs rises, they have the power to readily pass these costs on to borrowers. Moody's ratings agency, in its recent review of the Big 4 (press release 16 February), was explicit: "The banks' franchises have been enhanced -- and their pricing power maintained -- by market consolidation and by the exit of price-led, securitization-funded competitors."

The Big 4 banks reported an aggregated $20.7 billion in profits for 2009-10 (Westpac $6.3 billion, CBA $5.7 billion, ANZ $4.5 billion, NAB $4.2 billion) – up from $13.7 billion in 2008-09. The Big 4 sit at the apex of a financial system that has gradually made inroads into profitability of the 'real economy', an insidious process called 'financialisation'. In 1959-60, the gross income of financial corporations in general as a percentage of total corporate income was 5.8 per cent; as a percentage of total business income, it was 2.4 per cent. By late 2006, the percentages had risen to 20 per cent and 15 per cent respectively, and have fluctuated around those levels since.

Bank consolidation and the resulting enhanced market power increase lender leverage over customers, the leverage being exacerbated during general crises. Traditionally, the most vulnerable customers are in the small and medium enterprise (SME) and family farmer (hidden within 'agribusiness') segments. These segments have long been subject to unconscionable practices by major bank lenders. But the practices have typically been condoned by the courts when litigation ensues (partly a consequence of an uncomprehending legal culture and partly due to judicial complicity). Moreover, the regulators entrusted with mitigating malpractice have been singularly missing in action. 'Business to business' unconscionability was legislated into the Trade Practices Act (s.51AC) in 1998 but the Australian Competition & Consumer Commission pursued no credit provider under the section, in spite of complaints by SME/farmer customers against their bank lenders. Business to business unconscionability in financial services was moved to the ASIC Act in 2001 (s.12CC), but the Australian Securities and Investments Commission has replicated the inaction of the ACCC.

The Australian Prudential Regulation Authority, atypically, formally combines structural and macroeconomic regulatory responsibilities. At the structural level, APRA has the power to intervene in bank practices but has exercised that power only once (with respect to trading desk illegalities at the National Australia Bank in 2004). APRA monitors bad debt figures but remains detached from bank lending portfolios and the terms on which the banks determine the quantum of bad debts (and associated defaults and foreclosures).

De facto, then, APRA confines itself to the macro picture. APRA's interest is with system stability, which in practice means major bank viability. The acid test is comparison with the 'bad times' of the early 1990s recession – the bank impaired assets to total assets ratio was 3.46% as at June Qr 1990 (the first consistent figures), rising to 6.91% by March Qr 1992. The ratio for June Qr 2009 was 1.11%, so APRA's mentality is that the 2008 crisis was pretty small beer.