Here's a scorecard for Joe Hockey's nine point plan on bank re-regulation. This blogger can see why the Australian Bankers Association responded positively. Not much to fear here.
1. Let’s give the ACCC power to investigate collusive price signalling (that is, oligopolistic behaviour), which is exactly what Graeme Samuel has called for.
H&H: And what's he going to do when he points to the obvious?
2. Let’s encourage APRA to investigate whether the major banks are taking on unnecessary risks in the name of trying to maximise short-term returns that conflict with the preferences of those that backstop the system, namely taxpayers;
H&H: They already do this. They've stress tested. They're preparing liquidity requirements. Hockey needs to put out some terms of reference around this or it's going nowhere.
3. Let’s formally mandate the RBA to publish regular—rather than irregular—reporting on bank net interest margins, returns on equity, and profitability so that we can all determine whether the major banks are extracting monopolistic profits; that is, whether taxpayers are effectively subsidising supernormal returns;
H&H: Ummm...these are published every month already
4. Let’s investigate David Murray’s proposal for Aussie Post to make its 3,800 branches available as distribution channels for smaller lenders. To be clear, the Coalition does not endorse Australia Post assuming balance-sheet risk and getting into the banking business itself;
H&H: So why investigate it then?
5. Let’s ask the Treasury and the RBA to investigate ways to further improve the liquidity of the residential and commercial mortgage backed securities markets, which are an alternate source of funding for smaller lenders, including consideration of the Coalition proposal to extend the Government’s credit rating to AAA rated commercial paper in those markets to improve liquidity;
H&H: NO! Let's not. Securitisation is part of the problem, not the answer to it.
6. Let’s explore further simplification of my beloved Financial Services Reform Act, to make the business of actually getting out and doing business easier and simpler;
H&H: Admirable I suppose but not terribly relevant.
7. Let’s direct APRA to explore whether the risk-weightings on business loans secured by residential properties are punitive. Many small businesses tell me that they do not receive sufficient financial benefit from pledging their family home to secure their borrowings;
H&H: Great idea. It's a grossly under-appreciated fact that much Australian small business is underpinned by homes.
8. Let’s commission a resolution to the debate about whether the banks should be able to issue “covered bonds”, in the same way other jurisdictions allow their banks to, which provides a more affordable line of credit;
H&H: Well...maybe...but although such bonds are rock solid for investors they can make it harder for banks under pressure because no bond haircuts are possible.
9. And let’s wrap up all of this work into a full review of the financial system—a Son of Wallis, or Grandaughter of Campbell, whatever you will.
H&H: Bring it on but not on these terms of reference.
With equal measures of hope and despair, and for the purposes of debate, here is Houses and Holes own nine point plan:
1. Let's mandate that APRA and the RBA publish regular and detailed statistics on both repo operations and offshore borrowing profiles for individual banks.
2. Let's mandate that the banks will never again receive a wholesale funding bailout.
3. Let's explore an FDIC-like institution that guarantees offshore borrowing through insurance premiums paid by the banks into a collective fund. It could be set up as a counter-cyclical, macro-prudential tool sitting between APRA and the RBA with the singular goal of keeping offshore borrowing within conservative risk limits. Or, it could be used to deliberately wind down the borrowing on a sustainable timeline. This idea might alternatively be structured as a Tobin tax.
4. Or, increase capital adequacy to 20%.
5. Let's start a new government bank with a charter of competing with banks without destroying them.
6. Let's phase out negative gearing and capital gains tax breaks for property.
7. Or, abolish taxes on deposits.
8. Let's place legislative limits on bank remuneration, including a blanket ban on bonus payments.
9. Let's have a fair dinkum son of Wallis Inquiry with a credible outsider in charge.
And finally, here are some answers to the questions that I know the libertarians amongst you, dear readers, will want to yell:
No, this blogger is not a communist. Yes, it is a liberal. No, it does not want to regulate other sectors of the economy.
Banking Day says:
In contrast to last week’s widely criticised media comments from the shadow treasurer, yesterday’s precisely structured speech reflected consultation with industry experts. In particular, it adopted many ideas previously advocated by Christopher Joye, influential commentator and head of financial advisory group Rismark International.
...The industry is desperate to avoid being forced into what is sometimes called the “narrow banking” model, regulated like a gas or water company and forced into accepting a low rate of return in exchange for a quasi-monopolistic position. Hockey’s remarks push the debate in this direction.
Although the nine points are very vague, to this blogger they appear to aim to take a chunk of the moral hazard currently enjoyed by the majors and hand it instead to securitisers. Hardly a new social compact.
The phrase missing from this entire discourse is "systemic risk". You aren't dealing with the huge liquidity risk in Australia's financial sector-mediated offshore borrowing just by shifting the moral hazard around.