All Power to the Big Four

Nevertheless, this 1% represented $29 billion of impaired assets, up from $4 billion two years previously. In 2009-10, when the crisis had supposedly blown over, the aftermath remained, with the impaired assets ratio at 1.23%. It is true that $10.3 billion of bad debt provisions was returned to balance sheets as 'cured loans' (c/f $8.5 billion for 2008-09). But an additional $25 billion of 'new impaired assets' was provided for during 2009-10, and $11.6 billion of impaired assets was written off (c/f $6.4 billion for 2008-09).

These are aggregate figures, the scale of which APRA and the RBA consider inconsequential. The regulators have not confronted the material reality behind the abstract figures. The figures are the reflection of ill-considered lending, enhanced during the hot-house climate of boom. The banks lent to dysfunctional companies (ABC Learning, Babcock & Brown, Allco Finance). The banks lent indiscriminately on commercial property (Centro as exemplar). In particular, banks threw millions at 'pub' buyouts at ludicrously inflated prices.

If APRA and the RBA looked behind the numbers they might be led to inquire as to the lending practices of the banks, the skills and payment structures of the staff, and of bank culture in general. Rather than self-congratulation, questions might be asked as to how such dysfunctional elements can be reduced to ameliorate future crises.

Having opened the door to material detail, the financial regulators might be forced to confront the qualitative character of the beast. The neglected human side is most transparent in the housing loan sector. By June 2009, .62% of home loans (by value) on bank balance sheets were in (90-day) arrears (admittedly the figure was higher for mortgage broker loans). Little to worry about claims the RBA, but the pain associated with thousands of home repossessions goes unnoticed. Indeed, disgracefully, there are no official national figures for home repossessions.

The unsavoury dimensions exposed by the crisis are multiple. Of course, some of these dimensions are outside the banking sector, such as dodgy funds managers (City Pacific, MFS) and dodgy agribusiness 'managed investment schemes' (Great Southern). But banking, given its central role and licensing privileges, can't avoid the temptation of murky waters.

Foremost, there is the new odious scam on the block, margin lending. Opes Prime would have been of marginal significance if not for the funding deal with the ANZ bank. ASIC got a measly $253 million out of ANZ as blood money for the Opes debacle.

Storm Financial would have been of marginal significance if not for the funding deals with the CBA and its subsidiary Colonial First State (with supporting roles from Macquarie Bank and the Bank of Queensland). The 2009 Ripoll Parliamentary Inquiry into Storm Financial gave the CBA an imperceptible slap on the wrist. ASIC is still at the starting blocks regarding CBA involvement.

Meanwhile, staff at CBA subsidiary Commonwealth Financial Planning have been found to be misdirecting investor funds into high risk investments contrary to investor intent, attracting a class action but regulatory inaction. In addition, Colonial First State is still drawing management fees from a mortgage income fund that it froze two years ago, denying investor access to funds.

And this is from two of the financial sector's four pillars. ASIC skirts around the edges of this stuff, with minimal success. The Big 4 CEOs treat Parliamentary Inquiry hearings with contempt and are absolved.

Meanwhile, APRA busies itself with the latest round of Basel reforms. Basel III confronts what previous rounds denied – that short-term illiquidity can bring down a bank regardless of its capital adequacy. The Australian banks were illiquid, but were saved by stop-gap regulatory intervention – direct access to funds from the Reserve Bank and favoured access to funds raised elsewhere via RBA guarantees (at favourable rates to the major banks).

Nevertheless, Basel III remains in the hands-off tradition. Remarkably, bank off-balance sheet holdings remain untouched. In 2008, the NAB had over $5 billion in various derivative instruments off-balance sheet, and was forced to write-off 90% of the face value of a $1.2 billion tranche of Collateralised Debt Obligations – again prompting a class action but regulatory inaction. During the next post-boom crisis, the RBA will find itself providing liquidity and guarantees to the banks as in 2007-08. None of the fundamentals regarding bank practices and culture have changed.

In one of the more egregious developments, in December the Government mooted legislation to allow banks to issue 'covered bonds' to facilitate fund raising. The regulators have acquiesced. A covered bond involves the redefinition of bank liabilities (deposits) as 'assets', thence to be leveraged for greater borrowing. Apart from the scandalous removal of depositors from the first rank of creditors, the move will merely further entrench major bank dominance.

In general, commentators look at crisis management through the wrong lens. The four major banks are now sacred cows. The regulatory response to future financial crises in Australia will be mediated through, and at the discretion of, the Big 4. Whatever adverse economic and social consequences eventuate will continue to be ignored.