Thursday, November 4, 2010


This blog has dug up some beautiful graphs that show precisely where the RBA thinks net interest margins are for the big banks.

But it's not going to show them to you.

The reason why is that they're irrelevant.

Despite what all but a handful of senior commentators are telling you, neither interest rates nor net interest margins are what this debate is about.

What it is about is how to address the BIG LIE at the heart of our banking system.

Ever since the GFC we have been told again and again how exceptional our banking system is. How our banks weathered the storm better than anyone, anywhere.

Banks and authorities alike have deployed what this bloggers likes to call Invisopower! in defence of this illusion.

But rhetoric and slight-of-hand do not make it true.

The fact is that during the GFC, Australian banks relied on the government in the form of guarantees to liabilities not to weather the storm, nor to keep profits up, but to survive.

This is a matter of historical record, available for all to see in The Great Crash of 2008, this blogger's book with Ross Garnaut. Here is the money quote:
In the early days of October 2008, money poured into the big four Australian banks from other financial institutions. But life was becoming increasingly anxious for them as well. One by one they advised the government that they were having difficulty rolling over their foreign debts. Several sought and received meetings with Prime Minister Rudd. The banks told him that, if the government did not guarantee their foreign debts, they would not be able to roll over the debt as it became due. Some was due immediately, so they would have to begin withdrawing credit from Australian borrowers. They would be insolvent sooner rather than later.

The Australian Banker's Association responded to the historical record with this press release, in which they blustered all around the topic but never denied any of the historical account.

Since the crisis the banks have dramatically grown the very liabilities that caused the failure of the system. They can do so because, as Westpac let slip recently, they are trading on the assumption that in the event of another problem in offshore funding, they will again be bailed out with a guarantee.

At the same time, the failure of competition is allowing the banks to squeeze customers for huge profits, not to mention bonuses.

In short, we now have a system of private profit based upon public risk.

That is what this debate is about. How to address the BIG LIE.


Anonymous said...

This is such a good piece. Thanks. What concerns me is the level of discussion/debate/understanding in the media. Woeful in the main.


David Llewellyn-Smith said...

Dunderheads, concentrated ownership, overly tight libel laws, vested interests and the Australian psyche of fearing to stick your neck out...

Anonymous said...

If the big four banks want to be so arrogant what the government should do is cut back the deposit guarantee for the big four to something between $20000-50000 but leave it several times higher for the smaller institutions. That could help distribute the money around and create a less concentrated banking system.