Pascoe's bank failure

Michael Pascoe has an entertaining piece today on banks. He begins with the sharp observation that once again this Labor government has completely stuffed the politics of reform:

For the usual petty political reasons, Wayne Swan dumbly tried to pre-empt the Senate banking competition inquiry – a decision that has come back to bite him hard after just two of the planned six days of hearings.

Sunday’s shiny reforms became Tuesday night’s embarrassing tatters, exposed as lame efforts on both the policy and populist fronts.

If he had waited, the Treasurer could have used key inquiry submissions to justify trying to do a bit but not much to increase competition. Instead, the inquiry has become the perfect platform for criticising Sunday’s effort, the anti-Big Four brigade given oxygen to claim not enough has been done while the two key regulators have damned the process with the very faintest of praise.

However, Pascoe then moves onto the technical aspects of bank failure, making the claim that:

That both the RBA and APRA know is that there are unspoken realities about the Australian banking market, that the global “too big to fail” issue doesn’t quite apply here – all our banks, credit unions and building societies are too big to fail, even the tiny ones.

Oh shareholders could take a bath, but the institutions themselves with their borrowers and depositors have to be managed. One credit union failing in the full sense of the word would undermine the whole sector.

If the sixth biggest bank went under, what would that do to confidence in the fifth and seventh biggest?

First and foremost, APRA itself would be seen as a failure so that, if the regulator was a dud, who knows what other houses in Bank Street might be full of termites?

No, the reality of our market is that dud deposit takers must be managed. The club would be called to heel.
A troubled bank or building society would be taken over. No panic, no queues here please. Nothing to see.

This blogger would like to point out that the process of seizing and/or selling a "troubled" bank by officialdom does not mean that it hasn't failed. Nor is it a process that is confined to Australia. In fact, it's used pretty much everywhere. In such a failure process, equity holders are usually next-to wiped out and management as well as the board is fired.

As Pascoe says, holders of the bank's liabilities - depositors and bondholders - are protected and the process is closely managed so that there is no public panic nor contagion.

This special failure process is a recognition of the importance of banks to the broader economy and therefore the different social compact within which they operate.

Which is why Pascoe's final point is also off base:

That a majority of people might fancy a super tax on banks demonstrates what a poor job the banks and Federal Treasurer have done at telling the good story about our financial system. If the banks’ return on equity is too high and deserves a super tax, so would Woolworths, Telstra and plenty of other mainstays of our superannuation funds.

As the saying goes: To every deeply complex question, there is an enticingly simple answer – and it will be wrong.

Indeed it will.

Banks ROE can only usefully compared with other businesses that operate within the same unique social compact.