What is the GFC doing to our banks?

Kevin Rudd declared in the February issue of The Monthly Magazine that "the great neo-liberal experiment of the past 30 years has failed"; that the deregulatory policies of the last three decades (and, of course, the Liberal Party) are to blame for the Global Financial Crisis and this whole sordid mess that we are in.

In his 7,000 word essay, Rudd describes at length the profound effect that the GFC is having and will continue to have on all people, including Australians. Having surveyed the wreckage, he sets out a social democratic manifesto for dealing with the aftermath of the GFC and for rebuilding our shattered economies.

It is difficult to overstate the impact of the GFC on the global financial system and economies generally, but it is important that policymakers in Australia are not overtaken by global events. The Australian financial system is a very different beast compared to its American counterpart, and our banking system faces its own, unique challenges. When examining the Australian banking system in the context of the GFC, it is important that we don't end up treating ourselves for someone else's disease.

It's global, not Australian

While many of America's biggest banks are on life support, our major banks are in good shape. Of the eight AA-rated banks in the world, Australia is home to four of them - CBA, ANZ, NAB and Westpac. There used to be 20 AA-rated banks before the GFC, including the Big Four, who are still there, hanging tough.

Unlike America, where sub-prime lending comprised 15-20 per cent of all loans, sub-prime mortgages in Australia accounted for 2-3 per cent of all mortgages. Australian banks were also far less active in the securitisation and derivative markets than their US counterparts. It is widely regarded that the quality of the loans and liabilities of Australian banks is pretty good, even though Australian households are carrying considerably more debt these days.

In terms of regulation, Australia is operating from a position of strength. The Obama administration has proposed five key objectives to financial sector reform in the United States. A number of those objectives emulate the current Australian regulatory framework.

For example, Obama is proposing a new Financial Services Oversight Council of prudential regulators - a national overarching regulator of prudential risk. This is the American equivalent of the Australian Prudential Regulation Authority, which incidentally the "neo-liberal" Howard government established in 1998.

Obama wants to protect consumers and investors from financial abuse. He proposes a new Consumer Financial Protection Agency to protect consumers across the financial sector from unfair, deceptive and abusive practices. ASIC and the ACCC have been doing this in Australia for years.

Obama wants closer scrutiny of the financial sector, stronger regulation and higher prudential standards. APRA and ASIC, the primary financial regulators in Australia, are well known for their close scrutiny and conservative approach to financial sector regulation.

The Australian position is very different from the America position, which makes Rudd's Australian analysis of the GFC, his attempt to make the world's problems our own, so misleading. Looking at the GFC from Down Under, you can draw a number of conclusions:

1. Australian banking balance sheets are in excellent shape;
2. Australian financial regulation has, on-the-whole and with a few exceptions (e.g. the HIH collapse), been pretty successful and well balanced; and
3. any social democratic program to make sweeping changes to the financial sector would be misconceived.

The Australian financial crisis

Nevertheless, the GFC is having a profound impact on the Australian financial sector. The GFC is reshaping the Australian financial sector and undoing a lot of good developments from the last decade. It has also exposed Australia's vulnerability to international capital flows, as a high debt and low saving nation.