Wednesday, November 24, 2010
Son of Wallis Challenge
The bank debate is not going well.
Following the lead of our populist political class, the discussion has bogged down in the relative irrelevance of interest rate rises and whether or not banks should be allowed to move their mortgage rates more or less than the Reserve Bank.
The obsession with lowest-common denominator politics means the country is overlooking what it needs to discuss most: why the banks are in this position in the first place.
Since the global financial crisis (GFC), it has become increasingly obvious that the private financial services regime envisioned by the Wallis Inquiry has failed.
Wallis divided regulation of private credit provision into halves. On one hand, deposit-taking banks were regulated by the Australian Prudential Regulation Authority (APRA). On the other, market-mediated credit providers, like non-banks, werent subject to any particular rules at all.
During the meltdown, however, neither the deposit-taking institutions nor the market-based credit intermediators were able to sustain their independence as private firms.
Mid-tier banks and non-banks either collapsed or were eaten by the big banks. The remnants have been supported by government purchases of their securities via the Australian Office of Financial Management, to the tune of almost $16 billion.
The big banks required several Federal government guarantees across their liability portfolios. For both local deposits and wholesale funds.
As Shadow Treasurer Joe Hockey wrote in The Australian Financial Review yesterday, all of these supports were explicitly rejected by the findings of the Wallis Inquiry.
However, that is not the worst omission from the debate.
Since the GFC, the big banks have continued to expand their exposure to global capital markets - with ADIs now owing over $500 billion to offshore creditors.
As Westpac recently confessed and commentators are more frequently accepting, the banks are doing so in the confident knowledge that in the event of another global, regional or local freeze in their funding markets, that they will again be bailed out by a return of the wholesale guarantee.
Yet the banks use the excuse of these same offshore borrowings as rationale for unilateral interest rate hikes.
Now, as the frenzied but limited bank debate turns the populist heat upon the government, it is preparing a new set of measures to boost competition in the hope that that will prevent the banks abuse their new market power.
This has suddenly unleashed a stream of analysts, economists and vested interests who are campaigning for a Wallis architecture patch-up job by boosting government guarantees for securitisers.
This despite securitisation itself being central to the GFC collapse.
In short, the debate has so far failed to ask any of the most important questions posed by the GFC about our financial system, including:
1. What are the risks and benefits of large bank wholesale debt and how should each be addressed?
2. What,precisely, is the ongoing status of the Federal government guarantee to the large banks wholesale debts and what are the implications for the Budget?
3. Given securitisation was at the centre of the GFC, what role should it play in renewed competition?
4. How can competition be returned to the financial services sector, as well as balanced against the need for stability in the light of the first three questions?
In the Australian Parliament there has been some encouraging movement toward discussion of these topics in the form of a Senate Inquiry.
However, the terms of reference of the Inquiry are as narrow and disappointing as the debate itself, focussed exclusively on the question of competition rather than larger questions such as how to address too-big-to-fail or the pitfalls of securitisation.
And trapped between a rampant Opposition and a lack of gumption, the government appears determined to ignore calls for a new Son-of-Wallis Inquiry, including in the well known 'six economists' letter.
There is, however, a place where the more important questions pertaining to our banks are being mooted and discussed: an emerging Australian markets and economics blogosphere.
This includes but is certainly not limited to the blogs Delusional Economics, The Unconventional Economist and this author's own blog, Houses and Holes.
That this is transpiring is encouraging but it is certainly not sufficient to carry the load of questions so central to the national interest.
Therefore, the three bloggers mentioned have combined with David Richardson of The Australia Institute to launch a private Son-of-Wallis challenge.
Each of us has contributed personal funds to a $1,000 prize for the best submission to the challenge. The terms of reference are as wide as you like but must address the four unanswered questions above in 1,500 words or less.
The judges of the prize will be the four financiers of the project plus Deep T., a senior financial services insider who is fed-up with his colleague's reliance on public support.
Enter your submission at firstname.lastname@example.org or visit www.sonofwallis.com for more information.
Deadline for submissions is December 13th. The winner will be announced shortly afterwards, as well as published at BusinessDay.